What prompts Japan to intervene in the Forex market? A new approach to a reaction function

Takatoshi Ito, Tomoyoshi Yabu

Research output: Contribution to journalArticle

62 Citations (Scopus)

Abstract

This paper estimates and analyzes the reaction function of Japanese intervention in the foreign exchange (Forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. A theoretical friction model is adopted to describe the intervention as cost-minimizing behavior. An ordered probit model, consistent with the theoretical model, is employed to estimate authorities' reaction function. A noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function. Major findings are as follows: (1) A regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions is detected; (2) the optimum cutoff is higher in the first half than the second half.

Original languageEnglish
Pages (from-to)193-212
Number of pages20
JournalJournal of International Money and Finance
Volume26
Issue number2
DOIs
Publication statusPublished - 2007 Mar
Externally publishedYes

Fingerprint

Foreign exchange market
Reaction function
Japan
Friction model
Ordered probit model
Authority
Ordered probit
Regime change
Costs

Keywords

  • Central bank intervention
  • Foreign exchange rates
  • Ordered probit
  • Political cost

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

What prompts Japan to intervene in the Forex market? A new approach to a reaction function. / Ito, Takatoshi; Yabu, Tomoyoshi.

In: Journal of International Money and Finance, Vol. 26, No. 2, 03.2007, p. 193-212.

Research output: Contribution to journalArticle

@article{494f97dd562d4edbbb7cc94d381212d1,
title = "What prompts Japan to intervene in the Forex market? A new approach to a reaction function",
abstract = "This paper estimates and analyzes the reaction function of Japanese intervention in the foreign exchange (Forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. A theoretical friction model is adopted to describe the intervention as cost-minimizing behavior. An ordered probit model, consistent with the theoretical model, is employed to estimate authorities' reaction function. A noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function. Major findings are as follows: (1) A regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions is detected; (2) the optimum cutoff is higher in the first half than the second half.",
keywords = "Central bank intervention, Foreign exchange rates, Ordered probit, Political cost",
author = "Takatoshi Ito and Tomoyoshi Yabu",
year = "2007",
month = "3",
doi = "10.1016/j.jimonfin.2006.12.001",
language = "English",
volume = "26",
pages = "193--212",
journal = "Journal of International Money and Finance",
issn = "0261-5606",
publisher = "Elsevier BV",
number = "2",

}

TY - JOUR

T1 - What prompts Japan to intervene in the Forex market? A new approach to a reaction function

AU - Ito, Takatoshi

AU - Yabu, Tomoyoshi

PY - 2007/3

Y1 - 2007/3

N2 - This paper estimates and analyzes the reaction function of Japanese intervention in the foreign exchange (Forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. A theoretical friction model is adopted to describe the intervention as cost-minimizing behavior. An ordered probit model, consistent with the theoretical model, is employed to estimate authorities' reaction function. A noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function. Major findings are as follows: (1) A regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions is detected; (2) the optimum cutoff is higher in the first half than the second half.

AB - This paper estimates and analyzes the reaction function of Japanese intervention in the foreign exchange (Forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. A theoretical friction model is adopted to describe the intervention as cost-minimizing behavior. An ordered probit model, consistent with the theoretical model, is employed to estimate authorities' reaction function. A noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function. Major findings are as follows: (1) A regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions is detected; (2) the optimum cutoff is higher in the first half than the second half.

KW - Central bank intervention

KW - Foreign exchange rates

KW - Ordered probit

KW - Political cost

UR - http://www.scopus.com/inward/record.url?scp=33847198335&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=33847198335&partnerID=8YFLogxK

U2 - 10.1016/j.jimonfin.2006.12.001

DO - 10.1016/j.jimonfin.2006.12.001

M3 - Article

AN - SCOPUS:33847198335

VL - 26

SP - 193

EP - 212

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

SN - 0261-5606

IS - 2

ER -