Optimal intervention in the foreign exchange market when interventions affect market dynamics

Details Optimal intervention in the foreign exchange market when interventions affect market dynamics Optimal intervention in the foreign exchange market when interventions affect market dynamics

2009-09-07

arxiv.org/abs/0909.1142v1

Economy

Quantitative Finance

General Finance

Scientific paper

We address the problem of optimal Central Bank intervention in the exchange rate market when interventions create feedback in the rate dynamics. In particular, we extend the work done on optimal impulse control by Cadenillas and Zapatero to incorporate temporary market reactions, of random duration and level, to Bank interventions, and to establish results for more general rate processes. We obtain new explicit optimal impulse control strategies that account for these market reactions, and show that they cannot be obtained simply by adjusting the intervention cost in a model without market reactions.

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