Little is known about the adequacy of changes in reserves as a proxy for intervention despite its use in computing exchange market pressure index. This paper demonstrates the co-movement between monthly reserves changes and intervention is governed by intervention amount, the frequency of the intervention and the nature of intervention activity. We find purchases and sales of US dollars intervention produces correlation asymmetry in the US but not in Japan and Germany. Furthermore, the conditional correlation is stronger when intervention frequency and amount increase. Our results are robust to influence of key macroeconomic factors and revaluation effects on foreign reserves.
Journal of International Financial Markets, Institutions and Money,22(4), 678-695