Market Volatility and Foreign Exchange Intervention

  • Srđan MarinkovićEmail author
  • Ognjen Radović
Part of the Contributions to Economics book series (CE)


This paper explores unilateral interventions by National Bank of Serbia on RSD/EUR market, conducted over the period from 2004 to 2010 inclusive. We have employed a Markov-switching model that describes the time-varying nature of the exchange rate volatility. The changing nature of volatility may arise due to the process of information arrivals or being liquidity driven, but can also be a consequence of interventions. We found the probability of switching between high-volatility and low volatility states conditioned upon the intervention. The regime switching model proved to be able to indicate correctly the ex ante identified structural breaks that came from intervention policy. Moreover, our study raises doubts that the central bank intervenes also in response of detrimental past exchange rate trends rather than solely in response to excess volatility.


Central bank interventions Exchange rate volatility Markov switching model 

JEL Classification Codes

C22 E44 F31 



The authors are grateful to the Republic of Serbia Ministry of Education, Science and Technological Development for the funds and support that made this research possible. The data on interventions were supplied by courtesy of the National Bank of Serbia.


  1. Beine M, Bénassy-Quéré A, Lecourt C (2002) Central bank intervention and foreign exchange rates: new evidence from FIGARCH estimations. J Int Money Finance 21(1):115–144CrossRefGoogle Scholar
  2. Beine M, Laurent S, Lecourt C (2003) Official central bank interventions and exchange rate volatility: evidence from a regime-switching analysis. Eur Econ Rev 47(5):891–911CrossRefGoogle Scholar
  3. Beine M, Janssen G, Lecourt C (2009a) Should central bankers talk to the foreign exchange markets? J Int Money Finance 28(5):776–803CrossRefGoogle Scholar
  4. Beine M, Laurent S, Palm FC (2009b) Central bank FOREX interventions assessed using realized moments. Int Financ Mark Inst Money 19(1):112–127CrossRefGoogle Scholar
  5. Bhattacharya U, Weller P (1997) The advantage to hiding one’s hand: speculation and central bank intervention in the foreign exchange market. J Monet Econ 39(2):251–277CrossRefGoogle Scholar
  6. Bjønnes HG, Rime D (2005) Dealer behavior and trading systems in foreign exchange markets. J Financ Econ 75(3):571–605CrossRefGoogle Scholar
  7. Blake D (2000) Financial market analysis. Wiley, ChichesterGoogle Scholar
  8. Calvo AG, Reinhart CM (2002) Fear of floating. Q J Econ 117(2):379–408CrossRefGoogle Scholar
  9. Chakrabarti R, Roll R (2002) East Asia and Europe during the 1997 Asian collapse: a clinical study of a financial crisis. J Financ Mark 5(1):1–30CrossRefGoogle Scholar
  10. Copeland T, Galai D (1983) Information effects on the bid-ask spread. J Finance 38(5):1457–1469CrossRefGoogle Scholar
  11. Dominguez MK (1998) Central bank intervention and exchange rate volatility. J Int Money Finance 17(1):161–190CrossRefGoogle Scholar
  12. Dominguez MK (2003) Foreign exchange interventions: did it work in the 1990s? In: Bergsten CF, Williamson J (eds) Dollar overvaluation and the world economy. Institute for International Economics, Washington, DCGoogle Scholar
  13. Dominguez MK (2006) When do central bank interventions influence intra-daily and longer-term exchange rate movements? J Int Money Finance 25(7):1051–1071CrossRefGoogle Scholar
  14. Dominguez MK, Frankel JA (1993a) Does foreign-exchange intervention matter? The portfolio effect. Am Econ Rev 83(5):1356–1369Google Scholar
  15. Dominguez MK, Frankel JA (1993b) Foreign exchange intervention: an empirical analysis. In: Frankel J (ed) On exchange rates. MIT Press, Cambridge, MAGoogle Scholar
  16. Edison HJ (1993) The effectiveness of central-bank intervention: a survey of the literature after 1982. Special papers in international economics no. 18, Princeton UniversityGoogle Scholar
  17. Engel C, Hamilton J (1990) Long swings in the exchange rate: are they in the data and do markets know it? Am Econ Rev 80(4):689–713Google Scholar
  18. Evans DM, Lyons RK (2002a) Order flow and exchange rate dynamics. J Polit Econ 110(1):170–180CrossRefGoogle Scholar
  19. Evans DM, Lyons RK (2002b) Time-varying liquidity in foreign exchange. J Monet Econ 49(5):1025–1051CrossRefGoogle Scholar
  20. Fatum R, Hutchison MH (2003) Is sterilised foreign exchange intervention effective after all? An event study approach. Econ J 113(487):390–411CrossRefGoogle Scholar
  21. Hamilton J (2008) Regime-switching models. In: Durlauf S, Blume L (eds) New Palgrave dictionary of economics, 2nd edn. Palgrave McMillan, LondonGoogle Scholar
  22. Harris L (2003) Trading and exchange: market microstructure for practitioners. Oxford University Press, New York, NYGoogle Scholar
  23. Henderson D, Sampson S (1983) Intervention in foreign exchange markets: a summary of ten staff studies. Fed Reserv Bull 69:830–836Google Scholar
  24. Jovanović M (2009) Serbian foreign exchange market during 2004–2008. SEEMHN Papers No. 19, National Bank of Serbia, BelgradeGoogle Scholar
  25. Kearns J, Rigobon R (2005) Identifying the efficacy of central bank interventions: evidence from Australia and Japan. J Int Econ 66(1):31–48CrossRefGoogle Scholar
  26. Lyons KR (1995) Test of microstructural hypotheses in the foreign exchange market. J Financ Econ 39(2/3):321–351CrossRefGoogle Scholar
  27. Marinković S (2014) Non-parametric sign test and paired samples test of effectiveness of official FX intervention. Econ Ann 59:107–130CrossRefGoogle Scholar
  28. Mussa M (1981) The role of official intervention. Occasional Paper No. 6, Group of Thirty, Washington, DCGoogle Scholar
  29. NBS (2006) Memorandum Narodne banke Srbije o principima novog okvira monetarne politike: Na putu ka ostvarenju ciljeva niske inflacije. Narodna banka Srbije. Accessed 15 Aug 2012
  30. NBS (2008a) Sporazum o ciljanju (targetiranju) inflacije. Narodna banka Srbije. Accessed 15 Aug 2012
  31. NBS (2008b) Memorandum Narodne banke Srbije o ciljanju (targetiranju) inflacije kao monetarnoj strategiji. Narodna banka Srbije. Accessed 15 Aug 2012
  32. O’Hara M (2004) Market microstructure theory. Blackwell, Cambridge, MAGoogle Scholar
  33. Perlin M (2014) MS Regress – The MATLAB package for markov regime switching models. or
  34. Sarno L, Taylor MP (2001) Official intervention in the foreign exchange market: is it effective, and if so, how does it work? J Econ Lit 39(3):839–868CrossRefGoogle Scholar
  35. Siegel J (2002) Stocks for the long run. McGraw-Hill, New York, NYGoogle Scholar
  36. Stix H (2002) Does central bank intervention influence the probability of a speculative attack? Evidence from the EMS. Working paper, No. 80, Oesterreichische Nationalbank, ViennaGoogle Scholar
  37. Stoll H (1978) The supply of dealer services in securities markets. J Finance 33(4):1133–1151CrossRefGoogle Scholar
  38. Taylor PM (2004) Is official exchange rate intervention effective? Economica 71:1–11CrossRefGoogle Scholar
  39. Taylor PM (2005) Official foreign exchange interventions as a coordinating signal in the dollar-yen market. Pac Econ Rev 10(1):73–82CrossRefGoogle Scholar
  40. West K (1988) Bubbles, fads and stock price volatility tests: a partial evaluation. J Finance 43(3):639–656CrossRefGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2016

Authors and Affiliations

  1. 1.Faculty of EconomicsUniversity of NišNišRepublic of Serbia

Personalised recommendations