Journal article
Central bank intervention with limited arbitrage
International journal of finance and economics, Vol.12(2), pp.249-260
04/2007
DOI: 10.1002/ijfe.328
Abstract
Shleifer and Vishny (SV) pointed out some of the practical and theoretical problems associated with assuming that rational risk-arbitrage would quickly drive asset prices back to long-run equilibrium. In particular, they showed that the possibility that asset price disequilibrium would worsen, before being corrected, tends to limit rational speculators. Uniquely, SV showed that ‘performance-based asset management’ would tend to reduce risk-arbitrage when it is needed most, when asset prices are furthest from equilibrium. We analyse a generalized SV model for central bank intervention. We show that increasing availability of arbitrage capital has a pronounced effect on the dynamic intervention strategy of the central bank. Intervention is reduced during periods of moderate misalignment and amplified at times of extreme misalignment. This pattern is consistent with empirical observation.
Details
- Title: Subtitle
- Central bank intervention with limited arbitrage
- Creators
- Christopher J. Neely - Federal Reserve Bank of St. LouisPaul A. Weller - University of Iowa
- Resource Type
- Journal article
- Publication Details
- International journal of finance and economics, Vol.12(2), pp.249-260
- DOI
- 10.1002/ijfe.328
- ISSN
- 1076-9307
- eISSN
- 1099-1158
- Publisher
- John Wiley & Sons, Ltd
- Number of pages
- 12
- Language
- English
- Date published
- 04/2007
- Academic Unit
- Finance
- Record Identifier
- 9984963052802771
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