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 proposed by Bollerslev [Bollerslev, T., 1916, Generalized autoregressive conditional heteroskedasticity, J. Econometrics 31, 307-327] and the component GARCH model proposed by Engle and Lee [Engle. 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 component from the late 1990s to 2003, while it does not have an impact on volatility (both the short- and long-run volatilities) at all in the early 1990s. The stabilizing effect of the BOFs intervention in the late 1990s and the first few years of the 2000s is not enhanced by the Fed's coordinated intervention.