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Noise trading and exchange rate regimes

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Author Info
Olivier Jeanne
Andrew K Rose (Reserve Bank of New Zealand)

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Abstract

Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not by measurable macroeconomic fundamentals. This motivates a theoretical analysis of exchange rate regimes with noise traders. The presence of noise traders can lead to multiple equilibria in the foreign exchange market. The entry of noise traders alters the composition of the market and generates excess exchange rate volatility, since noise traders both create and share the risk associated with exchange rate volatility. In such circumstances, monetary policy can be used to lower exchange rate volatility without altering macroeconomic fundamentals.

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File URL: http://www.rbnz.govt.nz/research/discusspapers/g99_2.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number G99/2.

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Length: 32p
Date of creation: Mar 1999
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Handle: RePEc:nzb:nzbdps:1999/02

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Find related papers by JEL classification:
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Flood, Robert P & Rose, Andrew K, 1996. "Fixes: Of the Forward Discount Puzzle," The Review of Economics and Statistics, MIT Press, vol. 78(4), pages 748-52, November. [Downloadable!] (restricted)
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  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December. [Downloadable!] (restricted)
  3. Jeffrey A. Frankel & Kenneth A. Froot, 1991. "Chartists, Fundamentalists and the Demand for Dollars," NBER Reprints 1655, National Bureau of Economic Research, Inc.
  4. Flood, Robert P & Rose, Andrew K, 1998. "Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics," CEPR Discussion Papers 1944, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  6. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August. [Downloadable!] (restricted)
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  7. Krugman, Paul & Miller, Marcus, 1992. "Why Have a Target Zone?," CEPR Discussion Papers 718, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August. [Downloadable!] (restricted)
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  9. Andrew K. Rose, 1994. "Are exchange rates macroeconomic phenomena?," Economic Review, Federal Reserve Bank of San Francisco, pages 19-30. [Downloadable!]
  10. Nelson Mark & Yangru Wu, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Working Papers 98-05, Ohio State University, Department of Economics. [Downloadable!]
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  11. Stockman, Alan C. & Stockman, Alan C., 1983. "Real exchange rates under alternative nominal exchange-rate systems," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 147-166, August. [Downloadable!] (restricted)
  12. Takatoshi Ito & Richard K. Lyons & Michael T. Melvin, 1998. "Is There Private Information in the FX Market? The Tokyo Experiment," Journal of Finance, American Finance Association, vol. 53(3), pages 1111-1130, 06. [Downloadable!] (restricted)
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  13. Carlson, J.A. & Olser, C.L., 1997. "Rational Speculators and Exchange Rate Volatility," Papers 97-005, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  14. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March. [Downloadable!] (restricted)
  15. Robert P. Flood & Nancy P. Marion, 1996. "Speculative Attacks: Fundamentals and Self-Fulfilling Prophecies," NBER Working Papers 5789, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Aliber, Robert Z, 1976. " The Firm under Pegged and Floating Exchange Rates," Scandinavian Journal of Economics, Blackwell Publishing, vol. 78(2), pages 309-22.
  17. Hau, Harald, 1998. "Competitive Entry and Endogenous Risk in the Foreign Exchange Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 757-87.
  18. Jeffrey A. Frankel and Richard Meese., 1987. "Are Exchange Rates Excessively Variable," Economics Working Papers 8738, University of California at Berkeley.
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