1 Do Interventions in Foreign Exchange Markets Modify Investors’ Expectations? The Experience of Japan Between 1992 and 2003 Christophe Morel † & Jérôme Teïletche § Cahier de recherche n° 2005-04 First version: August 2004 This version: January 2005 ABSTRACT The purpose of this paper is to analyze the impact of the Bank of Japan’s official interventions on the JPY/USD parity during the period 1992-2003. The novelty of our approach is to combine two recent advances of the empirical literature on foreign exchange interventions: (i) drawing on over- the-counter option prices to characterize more precisely the distribution of market expectations; (ii) redefining interventions in terms of events as they tend to come in clusters. Moreover, in order to deal with the features of the data (small sample size, non-standard distribution), we use bootstrap tests. We show that interventions have a significant impact on the mean expectation (the forward rate). The results are more ambiguous for variance. Additionally, we find that the effect of interventions on skewness is significant, robust to different definitions of skewness, and consistent with the direction of interventions. On the contrary, our results clearly show that kurtosis is not affected by interventions. We finally show that: (i) coordination increases effectiveness of interventions; (ii) results are not altered when controlling for other economic and political news. JEL classification: F31, F33, F42, G14 Key words: FX interventions, risk-neutral density, event study, bootstrap, Bank of Japan. † University of Paris-Dauphine (CEREG – CNRS UMR 7088) and French Pensions Reserve Fund (FRR), christophe.morel@fondsdereserve.fr § IXIS Corporate and Investment Bank and University of Bordeaux-Montesquieu, jteiletche@ixis-cib.com We thank participants to the DULBEA-Solvay Business School seminar at Free University of Brussels, Rasmus Fatum, Gabriele Galati, Jean-Yves Gnabo, Christelle Lecourt, Christopher Neely, Florent Pochon, Ariane Szafarz and especially Michel Beine for helpful comments, suggestions and data help. Errors and omissions remain ours. The views expressed in this paper are those of the authors.