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Speculative noise trading and manipulation in the foreign exchange market

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  • Vitale, Paolo

Abstract

We investigate the possibility that in the foreign exchange market an uninformed speculator finds it convenient to trade on noise in order to gain an infromational advantage she can exploit in future. In a two-period model, we analyze the trade-off she faces between the cost of the "informational investment" and the profits this brings about. Our results give a possible explanation for the large volume of noise trading present in the foreign exchange market.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 19 (2000)
Issue (Month): 5 (October)
Pages: 689-712

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Handle: RePEc:eee:jimfin:v:19:y:2000:i:5:p:689-712

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Web page: http://www.elsevier.com/locate/inca/30443

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  1. Christopher Neely & Paul Weller, 2000. "Technical analysis and central bank intervention," Working Papers 1997-002, Federal Reserve Bank of St. Louis.
  2. Ito, Takatoshi & Roley, V. Vance, 1987. "News from the U.S. and Japan : Which moves the yen/dollar exchange rate?," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 255-277, March.
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  10. Peiers, Bettina, 1997. " Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1589-1614, September.
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  14. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September.
  15. L. Menkhoff & M. Schlumberger, 1995. "Persistent profitability of technical analysis on foreign exchange markets?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 48(193), pages 189-215.
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  17. Szakmary, Andrew C. & Mathur, Ike, 1997. "Central bank intervention and trading rule profits in foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 513-535, August.
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  22. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
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Citations

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Cited by:
  1. Paolo Vitale, 2007. "An assessment of some open issues in the analysis of foreign exchange intervention," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 155-170.
  2. Shino Takayama, 2013. "Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation," Discussion Papers Series 492, School of Economics, University of Queensland, Australia.
  3. Cumming, Douglas & Johan, Sofia & Li, Dan, 2011. "Exchange trading rules and stock market liquidity," Journal of Financial Economics, Elsevier, vol. 99(3), pages 651-671, March.
  4. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
  5. Lee, Eun Jung & Eom, Kyong Shik & Park, Kyung Suh, 2013. "Microstructure-based manipulation: Strategic behavior and performance of spoofing traders," Journal of Financial Markets, Elsevier, vol. 16(2), pages 227-252.
  6. H. Henry Cao & Richard K. Lyons & Martin D.D. Evans, 2003. "Inventory Information," NBER Working Papers 9893, National Bureau of Economic Research, Inc.
  7. Laopodis, Nikiforos T., 2005. "Feedback trading and autocorrelation interactions in the foreign exchange market: Further evidence," Economic Modelling, Elsevier, vol. 22(5), pages 811-827, September.
  8. Guo, Ming & Li, Zhan & Tu, Zhiyong, 2012. "A unique “T+1 trading rule” in China: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 575-583.
  9. Vitale, Paolo, 2006. "A Critical Appraisal of Recent Developments in the Analysis of Foreign Exchange Intervention," CEPR Discussion Papers 5729, C.E.P.R. Discussion Papers.

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