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Exchange Rate Management in Emerging Markets: Intervention via an Electronic Limit Order Book

Schmeling, M., Melvin, M. M. and Menkhoff, L. (2009). Exchange Rate Management in Emerging Markets: Intervention via an Electronic Limit Order Book. Journal of International Economics, 79(1), pp. 54-63. doi: 10.1016/j.jinteco.2009.06.008

Abstract

This paper describes and analyzes the implementation of a crawling exchange rate band on an electronic trading platform. The placement of limit orders at the central bank's target rate serves as a credible policy statement that may coordinate beliefs of market participants. We find for our sample that intervention increases exchange rate volatility (and spread) for the next minutes but that intervention days show a lower degree of volatility (and spread) than non-intervention days. We also show for intraday data that the price impact of interbank order flow is smaller on intervention days than on non-intervention days. These stabilizing effects, however, rely on the conditions of large currency reserves and the existence of capital controls; an electronic market seems to support this goal.

Publication Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Economics, Volume 79, Issue 1, September 2009, Pages 54–63, http://dx.doi.org/10.1016/j.jinteco.2009.06.008.
Publisher Keywords: Foreign exchange market microstructure; Limit order book; Electronic crossing network; Exchange rate intervention
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/6244
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