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Systematic Intervention and Currency Risk Premia

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Systematic Intervention and Currency Risk Premia” authored by Marcel Fratzscher, Lukas Menkhoff, Lucio Sarno, Maik Schmeling, and Tobias Stoehr delves into the correlation between stabilization policies of central banks and the resulting “systematic intervention” patterns.

These patterns are observed through data on trades of 19 central banks intervening in currency markets. The study highlights that the systematic intervention is driven by and affects similar factors that drive currency excess returns: carry, momentum, value, and a dollar factor.

It also establishes the substantial variations in the sensitivity of an individual central bank’s intervention to these factors across countries, showcasing that developed countries profit from intervention while emerging markets incur significant losses.

Abstract Of Paper

Using data for the trades of 19 central banks intervening in currency markets, we show that stabilization policies by individual central banks lead to “systematic intervention” patterns. This systematic intervention is driven by and affects the same factors that drive currency excess returns: carry, momentum, value, and a dollar factor. The sensitivity of an individual central bank’s intervention to these factors differs markedly across countries, with developed countries making a profit from intervention and emerging markets incurring large losses.

Original paper – Download PDF

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Author

Marcel Fratzscher
DIW Berlin; Centre for Economic Policy Research (CEPR)

Lukas Menkhoff
German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin – Faculty of Economics

Lucio Sarno
University of Cambridge – Judge Business School; Centre for Economic Policy Research (CEPR)

Maik Schmeling
Goethe University Frankfurt – Department of Finance; Centre for Economic Policy Research (CEPR)

Tobias Stoehr
Kiel Institute for the World Economy; German Institute for Economic Research (DIW Berlin); IZA

Conclusion

In conclusion, the research paper “Systematic Intervention and Currency Risk Premia” provides compelling insights into the dynamics of central bank stabilization policies and their impact on currency risk premia.

The authors’ identification of “systematic intervention” patterns, and its correlation with factors influencing currency excess returns, reveals the intricate interplay between central bank intervention and currency markets.

The substantial disparities in intervention sensitivity across developed and emerging markets further underscore the complexities of currency risk premia.

This research offers valuable implications for policymakers, investors, and academics, paving the way for deeper exploration into the influence of central bank intervention on currency markets and the resultant risk premia.

Related Reading:

Beta’em Up: What is Market Beta in FX?

Currency Momentum, Carry Trade, and Market Illiquidity

FAQ

Q1: What is the main focus of the research paper “Systematic Intervention and Currency Risk Premia” by Marcel Fratzscher, Lukas Menkhoff, Lucio Sarno, Maik Schmeling, and Tobias Stoehr?

A1: The main focus of the research paper is to investigate the correlation between stabilization policies of central banks and the resulting “systematic intervention” patterns observed through data on trades of 19 central banks intervening in currency markets. The study aims to understand how these systematic interventions are driven by and affect factors that also influence currency excess returns, such as carry, momentum, value, and a dollar factor.

Q2: What are the key findings regarding systematic intervention and its relationship with currency excess returns?

A2: The study finds that stabilization policies by individual central banks lead to “systematic intervention” patterns, and these patterns are influenced by the same factors that drive currency excess returns, including carry, momentum, value, and a dollar factor. The research highlights the intricate interplay between central bank intervention and currency markets, revealing that systematic intervention is closely tied to factors affecting currency risk premia.

Q3: How does the research contribute to the understanding of the impact of central bank intervention on currency risk premia?

A3: The research contributes to the understanding of the impact of central bank intervention on currency risk premia by identifying systematic intervention patterns and linking them to factors influencing currency excess returns. The findings provide insights into the complexities of how central banks’ actions in currency markets interact with and affect risk premia.

You can find many more Research Papers here

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