Effects of central bank intervention on the Japanese Yen-US dollar foreign exchange market : evidence from a double threshold-GARCH model

Hardy, Kathryn. (2006). Effects of central bank intervention on the Japanese Yen-US dollar foreign exchange market : evidence from a double threshold-GARCH model Honours Thesis, School of Economics, The University of Queensland.

       
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Author Hardy, Kathryn.
Thesis Title Effects of central bank intervention on the Japanese Yen-US dollar foreign exchange market : evidence from a double threshold-GARCH model
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2006
Thesis type Honours Thesis
Total pages 96
Language eng
Subjects 14 Economics
Formatted abstract Previous empirical evidence of the effectiveness of central bank intervention in foreign exchange markets has generally supported the conclusion that intervention has no significant impact on the level of exchange rates and mostly causes an increase in the volatility of exchange rates. Most of these studies however have only considered a linear specification to model exchange rate dynamics, with variations of GARCH processes as volatility measures. In light of recent empirical evidence of nonlinearities in the time series behaviour of exchange rates, this thesis focuses on the analysis performed by Watanabe and Harada (2006) on the effect of the Bank of Japan's and the Federal Reserve Bank's intervention in the foreign exchange market on the volatility and level of the Japanese yen-US dollar exchange rate in which they consider a linear GARCH specification. We attempt to extend the analysis of Watanabe and Harada (2006) by using a nonlinear exchange rate model and compare the findings to the results from the linear exchange rate model. For the purpose of our analysis we adopt a double-threshold Self Exciting TAR-GARCH model in which thresholds are included in both the conditional mean and variance equations. In so doing, we find that the threshold model captures significant impacts of intervention on both the level and volatility of the exchange rate by allowing possible regime changes in exchange rates dynamics which the linear models does not account for. We also find evidence of asymmetric volatility in the Japanese yen-US dollar exchange rate over the sample period.

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Document type: Thesis
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