Does the simple microstructure model tell the time of the FX intervention? A one day analysis of the Japanese FX intervention

• I utilize a regime-switching model to detect the time of the FX intervention.
• The estimated time is consistent with the official starting time.
• The intervention brings the damping effect that private order flows convey no information.
• The first intervention of a sequence has a larger impact than subsequent ones.

Using tick data of the USD/JPY rate, I propose the method to detect the time of the FX intervention. I use the simple microstructure model and assume that the FX intervention causes regime-switching in the microstructure of the USD/JPY market, changes in adverse selection, and inventory effect. The time of the intervention is estimated endogenously by the Markov-switching model, and the actual starting time is well estimated. I also find that no market orders, except a large U.S. dollar purchase, convey any private information during the period of the intervention.

Frequency of state 1 (regime of FX intervention) in the Asian segment.Figure optionsDownload as PowerPoint slide