"Central Bank Exchange Rate Interventions and Market Expectations: The Case of México During the Financial Crisis 2008-2009 "

Abstract

The objective of this paper is to examine if the exchange-rate interventions of the Central Bank of Mexico during the 2008-2009 financial crisis had an effect on the (Mexican Peso-US Dollar) exchange rate market expectations. Expectations are generated by Risk-Neutral Densities (RNDs) extracted from option prices; the used method to estimate RNDs is the volatility function technique proposed by Malz (1997). The obtained results show that interventions caused changes in expectations around the date of the intervention. There is a pattern of a statistically significant decreasing of the mean and variance in the implied exchange rate immediately after the period of intervention. The higher implied moments decrease as well. Finally, it was also found a causality effect that runs in both directions; between exchange-rate expectations and Central Bank interventions.