WHERE DOES THE METEOR-SHOWER COME FROM - THE ROLE OF STOCHASTIC POLICY COORDINATION

This paper examines the intra-daily volatility of the yen/dollar exchange rate over three different regimes from 1979 to 1988 which correspond to different degrees of international policy coordination. In each regime we test for heat wave vs. meteor shower effects. The heat wave hypothesis assumes that volatility has only country-specific autocorrelations, while the meteor shower hypothesis allows volatility spillovers across markets. Meteor showers can be caused by stochastic policy coordination, or by gradual release of private information. The rejection of the heat wave hypothesis in the early 1980s discredits the stochastic policy coordination interpretation.