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Speculative noise trading and manipulation in the foreign exchange market

  • Vitale, Paolo

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Blake LeBaron, 1994. "Technical Trading Rule Profitability and Foreign Exchange Intervention," International Finance 9411002, EconWPA.
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  11. 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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  13. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
  14. Jeffrey A. Frankel & Kenneth A. Froot, 1986. "The Dollar as an Irrational Speculative Bubble: A Tale of Fundamentalisists," NBER Working Papers 1854, National Bureau of Economic Research, Inc.
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  17. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September.
  18. Goodman, Stephen H, 1979. "Foreign Exchange Rate Forecasting Techniques: Implications for Business and Policy," Journal of Finance, American Finance Association, vol. 34(2), pages 415-27, May.
  19. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
  20. Neely, Christopher J. & Weller, Paul A., 2001. "Technical analysis and central bank intervention," Journal of International Money and Finance, Elsevier, vol. 20(7), pages 949-970, December.
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