Kiel Working Papers, Kiel Institute for World Economics
No 971:
The Effectiveness of the FX Market Interventions of the Bundesbank During the Louvre Period: An Options-Based Analysis
Christian Pierdzioch
Abstract: The effectiveness of the foreign exchange market
interventions conducted by the Deutsche Bundesbank during the Louvre period
to alter either the level or the volatility of the $/DM spot rate is
examined. Volatility quotes implicit in foreign currency options are
employed to recover the impact of interventions on the variability of
exchange rates. A contingent claims valuation framework allowing to
highlight the implications of infrequent interventions for the valuation of
options on foreign currency is constructed. The impact of interventions on
FX option premia in a regime characterized by infrequent interventions and
implicit intervention thresholds and in a pure managed float system is
analyzed. A multifactor success criterion is developed to assess the
effectiveness of the forex interventions of the Bundesbank empirically
within the context of a qualitative dependent variable model.
Keywords: Central Bank Interventions, Foreign Currency Options, Implied Volatility, Ordered Probit Model; (follow links to similar papers)
JEL-Codes: F31; G13; (follow links to similar papers)
59 pages, March 2000
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