Central Bank Exchange Rate Interventions and Market Expectations : The Case of Mexico during the Financial Crisis 2008-2009

The objective of this research paper is to analyze if exchange rate interventions that the Central Bank of Mexico had during the 2008-2009 financial crisis influenced the Mexican Peso-US Dollar exchange rate market expectations. Expectations are gauged by Risk-Neutral Densities (RNDs) extracted from option prices. The method used to estimate RNDs is the Volatility Function Technique proposed by Malz (1997). The results show that interventions caused changes in expectations around the date of the intervention. There is a common pattern of statistical significant decreases in exchange rate implied mean and variance immediately after the period of intervention. The higher implied moments decrease as well. There is also found a causality effect that runs in both directions, that is, between exchange rate expectations and Central Bank interventions