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Please use this identifier to cite or link to this item: http://hdl.handle.net/2108/310

Title: Monitoring bands and monitoring rules: how currency intervention can change market composition
Authors: Corrado, Luisa
Miller, Marcus
Zhang, Lei
Keywords: monitoring rules
monitoring band
bear and bull traders
excess volatility
Central Bank volatility
Issue Date: Feb-2007
Publisher: CEIS
Series/Report no.: CEIS Tor Vergata Research Paper; 92
Abstract: In this paper we show how trading rules can generate excess volatility in the exchange rate through repeated entry and exit of currency bears and bulls. This is something of a caricature: but it allows us to show that offcial action can have self-fulfilling effects as market composition shifts in ways that support offcial stabilization. Intervention if and when the rate moves outside what Williamson has labelled 'monitoring bands' can reduce market volatility as the effect of the policy is to select endogenously traders from the market whose expectations match offcial intervention.
URI: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962489
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