Long Memory Volatility, Central Bank Intervention and Uncovered Interest Rate Parity in the 1920s Exchange Markets
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The 1920s exchange markets represent one of the earliest recorded periods of freely floating exchange rates and central bank interventions. This paper uses a set of daily exchange rate data in the 1920s for three currencies (French Franc, Belgium Franc and Italy Lira) against the British Pound, and finds the exchange rate returns have the widespread long memory volatility property that is consistent with the post Bretton Woods era. And, this paper quantifies the duration of the effectiveness of the heavy intervention by the Bank of France on three exchange rates. The intervention is found to have direct effects on the French franc spot rate, but not on market volatility. There is also some evidence that the intervention had moderate influence on the deviation from the uncovered interest rate parity in the exchange markets by Granger causing the excess returns which may be associated with a time dependent risk premium.
Abstract
The 1920s exchange markets represent one of the earliest recorded periods of freely floating exchange rates and central bank interventions. This paper uses a set of daily exchange rate data in the 1920s for three currencies (French Franc, Belgium Franc and Italy Lira) against the British Pound, and finds the exchange rate returns have the widespread long memory volatility property that is consistent with the post Bretton Woods era. And, this paper quantifies the duration of the effectiveness of the heavy intervention by the Bank of France on three exchange rates. The intervention is found to have direct effects on the French franc spot rate, but not on market volatility. There is also some evidence that the intervention had moderate influence on the deviation from the uncovered interest rate parity in the exchange markets by Granger causing the excess returns which may be associated with a time dependent risk premium.
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