Effects of the Bank of Japan’s intervention.pdfVIP

J. Japanese Int. Economies 20 (2006) 99–111 /locate/jjie Effects of the Bank of Japan’s intervention on yen/dollar exchange rate volatility Toshiaki Watanabe a , Kimie Harada b,∗ a Faculty of Economics, Tokyo Metropolitan University, 1-1 Minami Ohsawa, Hachioji-shi, Tokyo 192-0397, Japan b Graduate School of International Accounting, Chuo University, 42-8 Honmura-cho, Ichigaya, Shinjuku, Tokyo 162-8473, Japan Received 18 September 2002; revised 13 February 2004 Available online 21 November 2004 Watanabe, Toshiaki, and Harada, Kimie—Effects of the Bank of Japan’s intervention on yen/dollar exchange rate volatility This paper examines the effects of the Bank of Japan’s (BOJ) intervention on the volatility as well as the level of the yen/dollar exchange rate. Specifically, the conventional GARCH model pro- posed by Bollerslev [Bollerslev, T., 1986. Generalized autoregressive conditional heteroskedasticity. J. Econometrics 31, 307–327] and the component GARCH model proposed by Engle and Lee [En- gle, R.F., Lee, G.G.J., 1999. A long-run and short-run component model of stock return volatility. In: Engle, R., White, H. (Eds.), Cointegration, Causality and Forecasting. Oxford Univ. Press, Oxford, UK, pp. 475–497], where the volatility consists of short-run and long-run components, are estimated using the BOJ’s and the Federal Reserve system’s (Fed’s) official intervention data. Results based on the component GARCH model provide new evidence on the effects of the BOJ’s intervention on the volatility of the yen/dollar exchange rate. The BOJ’s intervention only reduces the short-run volatility com