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Do Developing Countries Lose Money on Central Bank Intervention? The Case of Zambia in Copper-Market Boom and Bust

Author

Listed:
  • Simatele, Munacinga
  • Sjö, Bo

    (Division of Economics, Department of Management and Engineering, Linköping University)

  • Sweeny, Richard
Abstract
This paper is the first to discuss and estimate risk-adjusted intervention profits for a developing country, Zambia, representative of sub-Sahara African countries, of low-income and aid-recipient countries and the many developing countries dependent on natural-resource or staple exports. During the sample period 1996-2009, the copper market was a bust in the first half, with low prices and weak export demand; the Bank of Zambia intervened largely to sell dollars. The market boomed in the second half, and the BOZ largely bought dollars, save for a sharp break and rebound in 2008-2009. Estimated profits are positive for the whole period and are economically and statistically significant for the whole period and the second half. These stimates come from a new method developed in this paper. This method extends and corrects previous measures in the literature. It allows separating profits into those arising from timing ability and those arising from average exposure to risk, the equivalent of alpha or "stock picking." Because risk premiums are not available for Zambia, this paper uses an instrumental variables approach to adjust for risk. The paper also the first to investigate and fix problems arising from simultaneous equations bias.

Suggested Citation

  • Simatele, Munacinga & Sjö, Bo & Sweeny, Richard, 2016. "Do Developing Countries Lose Money on Central Bank Intervention? The Case of Zambia in Copper-Market Boom and Bust," LiU Working Papers in Economics 2, Linköping University, Division of Economics, Department of Management and Engineering.
    • Handle: RePEc:hhs:liuewp:0002
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    File URL: http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-125275
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    References listed on IDEAS

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    More about this item

    Keywords

    Intervention; Intervention Profits; Exchange Rates; Central Bank; Zambia;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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