Using GARCH to Measure the Effect of the Central Banks Intervention in the Foreign Exchange Market

Abstract

This paper examines the effect of the official intervention by the Reserve Bank of Australia and the Central Bank of Turkey on the Australian and on the Turkish exchange rates; respectively. The data series used in this paper covers the daily Australian intervention over the period January 2, 1998 to December 22, 2006 and the daily Turkish intervention over the period March 1, 2002 to April 30, 2007.

This paper uses a GARCH (1, 1) model to estimate the effect of intervention on the mean and volatility of the Australian dollar and Turkish lira. The empirical results found that official intervention is associated with a significant increase in exchange rate uncertainty. This finding supports the view of those who argue that exchange rate intervention serves to disrupt exchange rate markets.