Foreign exchange market intervention: implications of publicly announced and secret intervention for the euro exchange rate and its volatility

This paper explores the effects of foreign exchange market intervention by the European Central Bank and the Bank of Japan upon the conditional mean and variance of the euro-dollar and euro-yen exchange rates. To investigate whether the secrecy of intervention matters, we consider GARCH specifications revealing significant differences between publicly announced and secret interventions. While little evidence is found for the effectiveness of ECB intervention, the motivation is more clear for the Bank of Japan. Moreover Granger causality tests support a significant relationship between the bid-ask spread and conditional volatility only in the case of the JPY/EUR exchange rate indicating that intervention operations by the BoJ increased the uncertainty in the market. (C) 2004 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.