FIN-02-035 |
NYU Stern School of Business |
October 2002
Paolo Pasquariello
ABSTRACT
We study the impact of Central Bank intervention on the process of price
formation in currency markets. We use a unique dataset of tick-by-tick in-dicative
quotes posted by dealers on Reuters terminals and of intraday ster-ilized
spot interventions and customer transactions executed on behalf of the
Swiss National Bank (SNB) on the Swiss Franc/U.S. Dollar exchange rate
(CHFUSD) between 1986 and 1998. We find that potentially informative
SNB interventions (but not ex post uninformative customer transactions),
although small relative to daily trading volumes in the CHFUSD market,
had significant and persistent (albeit asymmetric, depending on their sign)
eects on daily currency returns, especially when (relatively) large in mag-nitude,
expected by the market, or inconsistent with existing momentum.
The market did not anticipate the occurrence of incoming interventions un-less
if chasing the trend. The SNB was much less successful in smoothing
fluctuations of the currency, for daily CHFUSD volatility always surged in
proximity of interventions, as did average absolute and proportional spreads.
Decomposition of estimated absolute spread shocks also reveals that SNB ac-tions
induced misinformation among market participants, impacted trading
immediacy, and increased market liquidity and competition among dealers.
Many of these changes translated into higher transaction costs borne by the
population of investors.
Classification: E58; F31; G15
Paolo Pasquariello
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0369
Fax: (212) 995-4233
Email: ppasquar@stern.nyu.edu
Homepage: http://pages.stern.nyu.edu/~ppasquar/
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