The Research On The Efficiency Of Sterilized Intervention In Foreign Exchange Markets

The stabilization of exchange rate plays an important role in the macro-economy operation. The wave propagation gives the economy much harmful effects. Under the circumstance, in order to'resist short-run trends'and'seek to return exchange rates to fundamental values', central bank put in place intervention operation. Intervention in foreign exchange market can be divided into sterilized intervention and un-sterilized intervention. It has always been one of the issues concerned by financial experts whether sterilized intervention is effective. Sterilized interventions may affect the exchange rate through two channels: portfolio balance and signaling channel. In the portfolio balance channel, domestic assets and foreign assets are assumed to be imperfectly substitutable. Risk-averse market participants need to be compensated for holding sub-optimal portfolios following the intervention. The signaling channel allows sterilized intervention to affect prices by conveying not only information on policy intentions, but also fundamental information about the future value of the currency.Beginning with the concept and theoretical basis of foreign exchange sterilized intervention, the thesis introduced two channels with the advantages and disadvantages. Then theory frame of the portfolio balance channel is discussed including the analysis of China's central bank sterilized intervention, based on macro-background and specific operation. Next we investigate whether daily intervention operations are related to changes in expectations over the stance of future monetary policy, where expectations are proxied by speculative net position in the foreign exchange future market changes in net position reflect the actions of speculators. Intervention depends on how speculators had their positions in the past with a GARCH time-series model. Finally the last part is demonstration, for the sake of improving the efficient of China's foreign exchange intervention, taking the international experience as reference. This thesis puts forwards to the policy suggestions directed at the existing problems.