Foreign exchange intervention and exchange rate exposure: evidence from South Africa and Japan

Bonga-Bonga, Lumengo and Nyambayo, Kudznai and Mpofu, Delani (2025): Foreign exchange intervention and exchange rate exposure: evidence from South Africa and Japan.

Abstract

Foreign exchange (forex) interventions by central banks have become increasingly frequent in emerging markets. While the effects of these interventions on exchange rate volatility are well-documented, their implications for broader country-level outcomes remain underexplored. This study posits that forex interventions should affect a country’s sensitivity to currency movements, particularly influencing its cash flows. It examines this hypothesis by analysing the impact of forex interventions on exchange rate exposure in South Africa, an emerging market, and Japan, a developed economy, using quarterly data from January 1996 to December 2023.The study utilizes the Kalman filter to estimate time-varying exchange rate exposure and applies quantile regression to explore the relationship between forex interventions and exchange rate exposure. The findings reveal that interventions generally have a negative effect on the absolute values of exchange rate exposure. Specifically, in South Africa, negative central bank interventions show a significant negative effect at the 50th quantile. In Japan, however, these interventions exhibit a positive effect from the 50th to the 90th quantile. Additionally, the study examines the effect of currency depreciation during periods of negative intervention but does not find statistically significant results. The research underscores the importance of credible communication from policymakers regarding the objectives of central bank interventions, as this could help firms better manage potential currency risks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign exchange interventions; Exchange rate risk exposure; Kalman filter; Quantile regression; Central banks
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Adjasi, C.K., Salifu, Z., and Osei, K.A., 2007. Foreign exchange risk exposure of listed companies in Ghana. The Journal of Risk Finance, 8(4), pp.380-393.

Adler, M. and B. Dumas, 1984. Exposure to currency risk: Definition and measurement. Financial Management, vol. 13, pp. 41-50.

Aggarwal, R., Harper, J.T., 2010. Foreign exchange exposure of “ domestic ” corporations. J. Int. Money Finance 29 (8), 1619–1636.

Aizenman, J. and Sun, Y., 2012. The financial crisis and sizable international reserves depletion: From ‘fear of floating ’to the ‘fear of losing international reserves’?. International Review of Economics & Finance, 24, pp.250-269.

Bartov, E. & Bodnar, G.M., 1994. Firm valuation, earnings expectations, and the exchange-rate exposure effect. The Journal of Finance, 49(5), pp.1755-1785.

Bartov, E., & Bodnar, G. M. 1994. Firm valuation, earnings expectations, and the exchange-rate exposure effect. Journal of Finance, 49(5), 1755-1785.

Braekers, R., Van Cauwenberge, A., Vancauteren, M., and Vandemaele, S., 2021. Measuring and explaining firm-level exchange rate exposure: The role of foreign market destinations and international trade. Economic Modelling, 105, p.105667.

Cassel, G., 1916. The present situation of the foreign exchanges. The Economic Journal, 26(103), pp.319-323.

Catalán-Herrera, J., 2016. Foreign exchange market interventions under inflation targeting: the case of Guatemala. Journal of International Financial Markets, Institutions and Money, 42, pp.101-114.

Chaieb, I., & Mazzotta, S. 2013. Macroeconomic factors and exchange rate exposure. Journal of Financial and Quantitative Analysis, 48(1), 175-200.

Choi, J. J., & Prasad, A. M. 1995. Exchange risk sensitivity and its determinants: A firm and industry analysis of US multinationals. Financial Management, 24(3), 77-88.

Chue, T.K., Cook, D., 2008. Emerging market exchange rate exposure. J. Bank. Finance 32 (7), 1349–1362.

Doidge, C., Griffin, J., & Williamson, R. (2006). Measuring the economic importance of exchange rate exposure. Journal of Financial Economics, 82(1), 199-231.

Doukas, J., Hall, P.H. and Lang, L.H., 1999. The pricing of currency risk in Japan. Journal of Banking & Finance, 23(1), pp.1-20.

Eduardo, L.Y., Sturzenegger, F., Gluzmann, P., 2013. Fear of appreciation. J. Dev. Econ. 101 (C), 233–247.

Friedman, M., 1953. The Case for Flexible Exchange Rates. Essays in Positive Economics/University of Chicago Press.

Iyke, B.N. and Ho, S.Y., 2021. Exchange rate exposure in the South African stock market before and during the COVID-19 pandemic. Finance Research Letters, 43, p.102000.

Jorion, P., 1990. The exchange rate exposure of U.S. multinationals. Journal of Business, vol. 63, no. 3, pp. 331-345.

Jorion, P., 1991. The pricing of exchange rate risk in the stock market. Journal of financial and quantitative analysis, 26(3), pp.363-376.

Kalman, R.E. 1960. A new approach to linear filtering and prediction problems. ASME Journal of Basic Engineering, 82(1), 35-45.

Keefe, H.G. and Shadmani, H., 2018. Foreign exchange market intervention and asymmetric preferences. Emerging Markets Review, 37, pp.148-163.

Klotzle, M.C., Pinto, A.C.F. and da Silveira Barbedo, C.H., and Viola, A.P., 2019. Foreign exchange interventions in Brazil and their impact on volatility: A quantile regression approach. Research in International Business and Finance, 47, pp.251-263.

Koch, W. 2006.Advanced target tracking techniques. Advanced Radar Signal and Data Processing, 2(1), 2-34.

Kodongo, O. and Ojah, K., 2011. Foreign exchange risk pricing and equity market segmentation in Africa. Journal of Banking & Finance, 35(9), pp.2295-2310.

Koenker, R., Bassett, G., 1978. Regression quantiles. Econometrica 46, 33–50.

Koenker, R., Hallock, K., 2001. Quantile regression. J. Econ. Perspect. 15, 143–156

Koutmos, G. & Martin, A.D., 2003. Asymmetric exchange rate exposure: Theory and evidence.

Koutmos, G., & Martin, A. D. 2003. Asymmetric exchange rate exposure: Theory and evidence. Journal of International Money and Finance, 22(3), 365-383.

Lin, C.H., 2011. Exchange rate exposure in the Asian emerging markets. Journal of Multinational Financial Management, 21(4), pp.224-238.

Loudon, G.F., 1993. Foreign exchange exposure and the pricing of currency risk in equity returns: Some Australian evidence. Pacific-Basin Finance Journal, 1(4), pp.335-354.

Menkhoff, L. & Stöhr, T., 2017. Foreign exchange intervention and the effectiveness of central banks in emerging markets. Journal of International Economics, 104, pp.189-202.

Menkhoff, L., & Stöhr, T. 2017. Foreign exchange intervention: A foreign exchange textbook review. Journal of Economic Surveys, 31(3), 654-686.

Mohanty, M.S. & Berger, B., 2013. Central bank foreign exchange market intervention and the volatility of exchange rates: Evidence from the G-10 countries. BIS Working Papers, No. 73. Bank for International Settlements.

Obstfeld, M., Shambaugh, J.C., Taylor, A.M., 2010. Financial stability, the trilemma, and international reserves. Am. Econ. J. Macroecon. 2 (2), 57–94.

Olufem, A.T., 2011. Exchange rate risk exposure of Nigerian listed firms: an empirical examination. International Business Research, 4(2), pp.219-225.

Sikarwar, E., 2020. Forex interventions and exchange rate exposure: Evidence from emerging market firms. Economic Modelling, 93, pp.69-81.

Streit, D., 2016. Firm-level effects of asymmetric intervention in foreign exchange markets: Evidence from the Swiss currency floor. Journal of International Money and Finance, 60, pp.289-312.