【日本の証拠に基づく研究📊】Central bank intervention and exchange rate volatility: Evidence from Japan using realized volatility：論文要約解説 No.6　2023/11/09

Abstract
This paper presents new empirical evidence on the effectiveness of Bank of Japan's foreign exchange interventions on the daily realized volatility of USD/JPY exchange rates using high frequency data.

Following Huang and Tauchen (2005) and Barndorff-Nielsen and Shephard, 2004, Barndorff-Nielsen and Shephard, 2006, we use bi-power variation to decompose daily realized volatility into two components: the smooth persistent and the discontinuous jump components.

We model exchange rate returns, the different components of realized volatility and the central bank intervention using a system of simultaneous equations.

We find strong support that interventions by Bank of Japan had increased both the continuous and the jump components of daily realized volatility.

This suggests that the interventions by Bank of Japan had increased market volatility which not only caused short-lived positive jumps, but were also persistent over time.

We did not find any evidence that interventions were effective in influencing the exchange rate returns for the entire sample period.

Conclusion
We analyze the effectiveness of interventions by Bank of Japan on exchange rate returns and volatility in the USD/JPY and DEM(EUR)/JPY foreign exchange markets.

We use realized volatility to measure the uncertainty of exchange rate movements because it is a model-free estimate and it provides an accurate proxy to the market volatility.

We decompose the daily realized volatility into a persistent continuous component and a discontinuous jump component.
We model exchange rate returns and the two components of realized volatility using a simultaneous equation model.

Using this framework, we distinguish the effect of CBI on the different components of daily realized volatility that most of the previous studies using GARCH-type models have overlooked.

One advantage of separating the smooth persistent volatility component and much less persistent jump process is that it can better describe in-sample price (exchange rate) processes and also provides out-ofsample forecast accuracy.
We also address the issue of endogeneity by using a simultaneous equation framework.

We find that intervention by Japanese monetary authorities were ineffective in influencing the exchange rate returns.
The authorities were also unsuccessful in stabilizing the daily realized volatilities in the FX markets.

Our results show that both the continuous and the jump components in the realized volatility increased substantially by the BOJ interventions.

These results hold for both the USD/JPY and the DEM(EUR)/JPY series. The results are also robust to unilateral interventions by BOJ and coordinated interventions by BOJ and Fed.
We also take into account the structural breaks in the USD/JPY series by differentiating between frequent and low interventions with infrequent and high interventions.

We find that the effect on the persistent component of the realized volatility is positive and highly significant in all the three sub-samples.

However, the effect of BOJ interventions on the jump component is only significant in the last sub-sample when interventions were infrequent and high.

This is in contrast to some of the previous studies.

The effect on daily exchange rate returns is less clear.
In particular, when BOJ intervenes by selling or buying yen, there is insignificant impact on the USD/JPY exchange rate returns.

This result holds for the coordinated interventions by BOJ and Fed in the USD/JPY market and unilateral intervention by BOJ in the DEM(EUR)/JPY market.

In the sub-sample analysis, the result in only strongly negative for unilateral interventions by BOJ in the USD/JPY market, i.e. selling of Yen by BOJ appreciates the Yen.

Overall, we do not find any evidence that interventions by BOJ are successful in stabilizing the exchange rates or influencing the returns in the proper direction.

On the contrary, BOJ interventions are associated with increasing both the persistent and the jump components of daily realized volatility.

Our future work is to model the relation between the volatility and central bank intervention using an extreme value theory, so that the estimation results are not subject to any scaling constraints.
Another direction of research is to first uncover a few common factors that drive the joint dynamics of the level of exchange rate, its volatility components, and intervention in a state-space factor model.