The Korean Economic Review
Long Memory Volatility, Central Bank Intervention and Uncovered Interest Rate Parity in the 1920s Exchange Markets
Richard T. Baillie (Michigan State University) and Young Wook Han (Hallym University)Year 2019Vol. 35No. 1
The 1920s exchange markets represent one of the earliest recorded periods of freelyfloating exchange rates and central bank interventions. This paper uses a set of dailyexchange rate data in the 1920s for three currencies (French Franc, Belgium Franc and ItalyLira) against the British Pound, and finds the exchange rate returns have the widespreadlong memory volatility property that is consistent with the post Bretton Woods era. And, thispaper quantifies the duration of the effectiveness of the heavy intervention by the Bank ofFrance on three exchange rates. The intervention is found to have direct effects on theFrench franc spot rate, but not on market volatility. There is also some evidence that theintervention had moderate influence on the deviation from the uncovered interest rate parityin the exchange markets by Granger causing the excess returns which may be associated witha time dependent risk premium.