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Foreign Exchange Intervention and Exchange Rate Volatility: Evidence from Turkey

Year 2019, Volume: 19 Issue: 2, 49 - 64, 17.06.2019
https://doi.org/10.18037/ausbd.566685

Abstract

This paper investigates the effects of foreign exchange intervention by the Central Bank of the Republic of Turkey on the behavior of exchange rates during the float period starting with 2001 crisis. Even though the bank is apparently quite willing to intervene the foreign exchange market during the float period, the results suggest that intervention policies are completely ineffective. More specifically, the purchases operations do not have any statistically significant impact on the exchange rate returns and volatility while the central bank intervention sales exert an incorrectly signed effect on the levels of exchange rates and tend to raise volatility of exchange rates returns. Hence, the bank should avoid intervening foreign currency markets. Additionally, the tightening monetary policy in the form of rising the short run interest rates is effective for positive exchange rates returns; but not for dampening the volatility.

References

  • Akinci, Ö., Çulha, O. Y., Özlale, Ü., & Şahinbeyoğlu, G. (2006). The effectiveness of foreign exchange interventions under a floating exchange rate regime for the Turkish economy: A post-crisis period analysis. Applied Economics, 38(12), 1371-1388.
  • Baillie, R.T. & Bollerslev, T. (1989). The message in daily exchange rates: A conditional-variance tale. Journal of Business & Economic Statistics, 7(3), 297-305.
  • Baillie, R. T. & Osterberg, W. (1997). Why do central banks intervene? Journal of International Money and Finance, 16(6), 909-19.
  • Beine, M., Bénassy-Quéré, A., & Lecourt, C. (2002). Central bank intervention and foreign exchange rates: New evidence from FIGARCH estimations. Journal of International Money and Finance, 21(1), 115-144.
  • Beine, M. & Lecourt C. (2004). Reported and secret interventions in the foreign exchange markets. Finance Research Letters, 1(4), 215-225.
  • Beine, M. (2014). Conditional covariances and direct central bank interventions in the foreign exchange markets. Journal of Banking & Finance, 28, 1385-1411.
  • Black, F. (1976). Studies of Stock Price Volatility Changes. Proceedings of the American Statistical Association. Business and Economics Statistics, 177-181.
  • Bollerslev, T. (1986). Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307-32.
  • Carlson, J. A. & Kim, I. (1994). Leaning against the wind: Do central banks necessarily lose? Purdue CIBER Working Papers, Paper 86.
  • Çiçek, M. (2014). An evidence for ineffectiveness of central bank foreign exchange interventions from Turkey. Journal of Applied Finance & Banking, 4(4), 39-54.
  • Dickey, D. A. & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427-431.
  • Diebold, F. & Nerlove, M. (1989). The dynamics of exchange rate volatility: A multivariate latent factor of ARCH model. Journal of Applied Econometrics, 4(1),1–21.
  • Dominguez, K. M. & Frankel, J. A. (1993). Does foreign exchange intervention matter? The portfolio effect. American Economic Review, 83(5), 1356-1369.
  • Dominguez, K. M. (1998). Central bank intervention and exchange rate volatility. Journal of International Money and Finance, 17(1), 161-190.
  • Dominguez, K. M. E. (2006). When do central bank interventions influence intra-daily and longer-term exchange rate movements? Journal of International Money and Finance, 25(7), 1051-1071.
  • Edison, H. J. (1993). The Effectiveness of Central Bank Intervention: A Survey of the Literature After 1982. Special Papers in International Economics, No: 18. Department of Economics, Princeton University.
  • Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987–1007.
  • Fatum, R. (2008). Daily effects of foreign exchange intervention: Evidence from Official Bank of Canada data. Journal of International Money and Finance, 27(3), 438-454.
  • Frenkel, M., Pierdzioch, C., & Stadtmann, G. (2005). The Effects of Japanese foreign exchange market interventions on the Yen/U.S. dollar exchange rate volatility. International Review of Economics & Finance, 14(1), 27-39.
  • Gnabo, J. & Lecourt, C. (2008). Foreign exchange intervention policy: With or without transparency? The case of Japan. Economie Internationale, 113(1), 5-34.
  • Gök, İ. Y., Özkul, G., & Özturk, E. (2016). Merkez Bankası müdahalelerinin döviz kurları üzerine etkileri: Türkiye üzerine ampirik bir araştırma. Finansal Araştırmalar ve Çalışmalar Dergisi, 15(8), 359-384.
  • Hsieh, D. A. (1988). The statistical properties of daily foreign exchange rates: 1974-1983. Journal of International Economics, 24(1-2), 129-145.
  • Hsieh, D. A. (1989). Modeling heteroscedasticity in daily exchange rates. Journal of Business and Economic Statistics, 7(3), 307-317.
  • Kearns, J. & Rigobon, R. (2005). Identifying the efficacy of Central Bank interventions: Evidence from Australia and Japan. Journal of International Economics, 66(1), 31–48.
  • Kim, S. J., Kortian, T. & Sheen, J. (2000). Central Bank intervention and exchange rate volatility-Australian evidence. Journal of International Financial Markets, Institutions and Money, 10 (2000), 381-405
  • Mandelbrot, B. B. (1963). The variation of certain speculative prices. Journal of Business, 36(4), 394-419.
  • Nelson, D. B. (1991). Conditional heteroscedasticity in asset returns: A New Approach. Econometrica, 59(2), 347-370.
  • Newey, W. K. & West, K. D. (1987). A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix. Econometrica 55(3), 703-708.
  • Phillips, P. C. B. & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346.
  • Sarno, L. & Taylor, M. P. (2001). Official intervention in the foreign exchange market: Is it effective and, if so, how does it work? Journal of Economic Literature, XXXIX, 839–68.
  • Schwarz, G. E. (1978). Estimating the dimension of a model. Annals of Statistics, 6(2), 461-464.
  • Shapiro, S. S. & Wilk, M. B. (1965). An analysis of variance test for normality (complete samples). Biometrika, 52(3/4), 591–61.
  • Tosini, P. A. (1977). Leaning Against the Wind: A Standard for Managed Floating. Essays in International Finance, No: 126. New Jersey: Princeton University.
  • Tuna, G. (2011). The effectiveness of central bank intervention: Evidence from Turkey. Applied Economics, 43(14), 1801-1815.
  • Tunay, K. B. (2008). Türkiye’de Merkez Bankası müdahalelerinin döviz kurlarının oynaklığına etkileri. BDDK Bankacılık ve Finansal Piyasalar Dergisi, 2(2), 77-111.
  • Utsunomiya, T. (2013). A new approach to the effect of intervention frequency on the foreign exchange market: Evidence from Japan. Applied Economics, 45(26), 3742-3759.
  • Westerfield, J. (1977). An examination of foreign exchange risk under fixed and floating rate regimes. Journal of International Economics, 7(2), 181-200.
Year 2019, Volume: 19 Issue: 2, 49 - 64, 17.06.2019
https://doi.org/10.18037/ausbd.566685

Abstract

References

  • Akinci, Ö., Çulha, O. Y., Özlale, Ü., & Şahinbeyoğlu, G. (2006). The effectiveness of foreign exchange interventions under a floating exchange rate regime for the Turkish economy: A post-crisis period analysis. Applied Economics, 38(12), 1371-1388.
  • Baillie, R.T. & Bollerslev, T. (1989). The message in daily exchange rates: A conditional-variance tale. Journal of Business & Economic Statistics, 7(3), 297-305.
  • Baillie, R. T. & Osterberg, W. (1997). Why do central banks intervene? Journal of International Money and Finance, 16(6), 909-19.
  • Beine, M., Bénassy-Quéré, A., & Lecourt, C. (2002). Central bank intervention and foreign exchange rates: New evidence from FIGARCH estimations. Journal of International Money and Finance, 21(1), 115-144.
  • Beine, M. & Lecourt C. (2004). Reported and secret interventions in the foreign exchange markets. Finance Research Letters, 1(4), 215-225.
  • Beine, M. (2014). Conditional covariances and direct central bank interventions in the foreign exchange markets. Journal of Banking & Finance, 28, 1385-1411.
  • Black, F. (1976). Studies of Stock Price Volatility Changes. Proceedings of the American Statistical Association. Business and Economics Statistics, 177-181.
  • Bollerslev, T. (1986). Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307-32.
  • Carlson, J. A. & Kim, I. (1994). Leaning against the wind: Do central banks necessarily lose? Purdue CIBER Working Papers, Paper 86.
  • Çiçek, M. (2014). An evidence for ineffectiveness of central bank foreign exchange interventions from Turkey. Journal of Applied Finance & Banking, 4(4), 39-54.
  • Dickey, D. A. & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427-431.
  • Diebold, F. & Nerlove, M. (1989). The dynamics of exchange rate volatility: A multivariate latent factor of ARCH model. Journal of Applied Econometrics, 4(1),1–21.
  • Dominguez, K. M. & Frankel, J. A. (1993). Does foreign exchange intervention matter? The portfolio effect. American Economic Review, 83(5), 1356-1369.
  • Dominguez, K. M. (1998). Central bank intervention and exchange rate volatility. Journal of International Money and Finance, 17(1), 161-190.
  • Dominguez, K. M. E. (2006). When do central bank interventions influence intra-daily and longer-term exchange rate movements? Journal of International Money and Finance, 25(7), 1051-1071.
  • Edison, H. J. (1993). The Effectiveness of Central Bank Intervention: A Survey of the Literature After 1982. Special Papers in International Economics, No: 18. Department of Economics, Princeton University.
  • Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987–1007.
  • Fatum, R. (2008). Daily effects of foreign exchange intervention: Evidence from Official Bank of Canada data. Journal of International Money and Finance, 27(3), 438-454.
  • Frenkel, M., Pierdzioch, C., & Stadtmann, G. (2005). The Effects of Japanese foreign exchange market interventions on the Yen/U.S. dollar exchange rate volatility. International Review of Economics & Finance, 14(1), 27-39.
  • Gnabo, J. & Lecourt, C. (2008). Foreign exchange intervention policy: With or without transparency? The case of Japan. Economie Internationale, 113(1), 5-34.
  • Gök, İ. Y., Özkul, G., & Özturk, E. (2016). Merkez Bankası müdahalelerinin döviz kurları üzerine etkileri: Türkiye üzerine ampirik bir araştırma. Finansal Araştırmalar ve Çalışmalar Dergisi, 15(8), 359-384.
  • Hsieh, D. A. (1988). The statistical properties of daily foreign exchange rates: 1974-1983. Journal of International Economics, 24(1-2), 129-145.
  • Hsieh, D. A. (1989). Modeling heteroscedasticity in daily exchange rates. Journal of Business and Economic Statistics, 7(3), 307-317.
  • Kearns, J. & Rigobon, R. (2005). Identifying the efficacy of Central Bank interventions: Evidence from Australia and Japan. Journal of International Economics, 66(1), 31–48.
  • Kim, S. J., Kortian, T. & Sheen, J. (2000). Central Bank intervention and exchange rate volatility-Australian evidence. Journal of International Financial Markets, Institutions and Money, 10 (2000), 381-405
  • Mandelbrot, B. B. (1963). The variation of certain speculative prices. Journal of Business, 36(4), 394-419.
  • Nelson, D. B. (1991). Conditional heteroscedasticity in asset returns: A New Approach. Econometrica, 59(2), 347-370.
  • Newey, W. K. & West, K. D. (1987). A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix. Econometrica 55(3), 703-708.
  • Phillips, P. C. B. & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346.
  • Sarno, L. & Taylor, M. P. (2001). Official intervention in the foreign exchange market: Is it effective and, if so, how does it work? Journal of Economic Literature, XXXIX, 839–68.
  • Schwarz, G. E. (1978). Estimating the dimension of a model. Annals of Statistics, 6(2), 461-464.
  • Shapiro, S. S. & Wilk, M. B. (1965). An analysis of variance test for normality (complete samples). Biometrika, 52(3/4), 591–61.
  • Tosini, P. A. (1977). Leaning Against the Wind: A Standard for Managed Floating. Essays in International Finance, No: 126. New Jersey: Princeton University.
  • Tuna, G. (2011). The effectiveness of central bank intervention: Evidence from Turkey. Applied Economics, 43(14), 1801-1815.
  • Tunay, K. B. (2008). Türkiye’de Merkez Bankası müdahalelerinin döviz kurlarının oynaklığına etkileri. BDDK Bankacılık ve Finansal Piyasalar Dergisi, 2(2), 77-111.
  • Utsunomiya, T. (2013). A new approach to the effect of intervention frequency on the foreign exchange market: Evidence from Japan. Applied Economics, 45(26), 3742-3759.
  • Westerfield, J. (1977). An examination of foreign exchange risk under fixed and floating rate regimes. Journal of International Economics, 7(2), 181-200.
There are 37 citations in total.

Details

Primary Language English
Journal Section Articles
Authors

Oğuz Tümtürk

Publication Date June 17, 2019
Submission Date March 19, 2018
Published in Issue Year 2019 Volume: 19 Issue: 2

Cite

APA Tümtürk, O. (2019). Foreign Exchange Intervention and Exchange Rate Volatility: Evidence from Turkey. Anadolu Üniversitesi Sosyal Bilimler Dergisi, 19(2), 49-64. https://doi.org/10.18037/ausbd.566685

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