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The Effects of Forex Intervention: A Simultaneous Equations Model

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Advanced Intelligent Computing Theories and Applications. With Aspects of Artificial Intelligence (ICIC 2011)

Part of the book series: Lecture Notes in Computer Science ((LNAI,volume 6839))

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Abstract

The Forex intervention is a main instrument to restrain the unexpected float of exchange rate. This paper constructs a simultaneous equations model (SEM) with the central bank reaction function and return of exchange rate to address the effects of Forex intervention. We find that the lagged intervention is a valid and rational instrumental variable to correct this simultaneity bias of Forex intervention and volatility. We also find that BoJ Forex intervention is more effective in “leaning with the wind” than in “leaning against the wind” condition, but unavoidably increases the volatility in either case, and consequently brings more financial risk.

This research is supported by National Social Science Foundation via Key Grant 07AJL005.

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Author information

Authors and Affiliations

  1. Management School, Hunan University, Changsha, P.R. China

    Feng Han & Chi Xie

  2. Center of Finance and Investment Management, Hunan University, Changsha, P.R. China

    Chi Xie

Authors
  1. Feng Han
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  2. Chi Xie
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Editor information

Editors and Affiliations

  1. School of Electronics and Information Engineering, Tongji University, 4800 Caoan Road, 201804, Shanghai, China

    De-Shuang Huang

  2. School of Computer and Communication Engineering, Zhengzhou University of Light Industry, No. 5, Dongfeng Road, Jinshui District, 450002, Zhengzhou, Henan, China

    Yong Gan

  3. Indian Institute of Technology Kanpur, 208016, Kanpur, India

    Phalguni Gupta

  4. Department of Biotechnology, Indian Institute of Technology Madras, 600 036, Chennai, Tamilnadu, India

    M. Michael Gromiha

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© 2012 Springer-Verlag Berlin Heidelberg

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Han, F., Xie, C. (2012). The Effects of Forex Intervention: A Simultaneous Equations Model. In: Huang, DS., Gan, Y., Gupta, P., Gromiha, M.M. (eds) Advanced Intelligent Computing Theories and Applications. With Aspects of Artificial Intelligence. ICIC 2011. Lecture Notes in Computer Science(), vol 6839. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-25944-9_37

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  • DOI: https://doi.org/10.1007/978-3-642-25944-9_37

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-25943-2

  • Online ISBN: 978-3-642-25944-9

  • eBook Packages: Computer ScienceComputer Science (R0)

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