Portfolio Balance, Price Impact, and Secret Intervention, Issue 8356
National Bureau of Economic Research, 2001 - Banks and banking, Central - 36 pages
This paper tests the portfolio-balance approach to exchange rate determination in a new way. Past work on portfolio balance in foreign exchange falls into two groups: (1) tests using measures of asset supply and (2) tests using measures of central-bank asset demand. We address the demand side, but we use a broad measure of public demand, rather than focusing on demand by central banks. Under floating rates, changing public demand has no direct effect on interest rates, current or future. This provides an opportunity to test for portfolio-balance effects on price. We develop and estimate a micro portfolio-balance model that has both Walrasian and microstructure features. Portfolio-balance effects are clearly present: the immediate price impact of public trades is 0.44 percent per $1 billion (of which, about 80 percent persists indefinitely). This estimate is applicable to central-bank trades as well, as long as they are sterilized, secret, and provide no monetary-policy signal. Intervention of this type is most effective when the flow of macroeconomic news is strong
What people are saying - Write a review
We haven't found any reviews in the usual places.
CB trade central bank order channel chi-squared LM test coefficients conveys Dealers trade denote distribution of hourly effect on price empirical model end of hour equilibrium Evans exchange rate exponential utility fifth-order bottom row first-order top row flow of macroeconomic foreign exchange market heteroskedasticity hour h hourly price changes imperfect substitutability interdealer order flow interdealer quotes interdealer trading intervention trade intraday Journal of Finance Journal of International kernel regression lagged price change Lyons macro macroeconomic announcements Market Microstructure Maskus micro portfolio-balance model microstructure Monetary NBER NBER Working Papers Nonparametric Nonparametric Regression number of trades order flow Xh percent per $1 portfolio balance portfolio shift portfolio-balance effects positive presents the p-value price effects price impact public information public trades quoting strategy rational expectations risk premium round-1 Rudi Dornbusch scalar price spot exchange rate symmetric BNE test for first-order trading in round trading rounds trading-theoretic approach typescript volatility Wald test