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Speculative Noise Trading and Manipulation in the Foreign Exchange Market

  • Vitale, P.

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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Paper provided by European University Institute in its series Economics Working Papers with number eco97/23.

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Length: 23 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:eui:euiwps:eco97/23
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  1. 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.
  2. Dominguez & K., 1997. "The Market Microstructure of Central Bank Intervention," Working Papers 412, Research Seminar in International Economics, University of Michigan.
  3. 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.
  4. 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.
  5. 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.
  6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  7. 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.
  8. Levich, Richard M. & Thomas, Lee III, 1993. "The significance of technical trading-rule profits in the foreign exchange market: a bootstrap approach," Journal of International Money and Finance, Elsevier, vol. 12(5), pages 451-474, October.
  9. L. Menkhoff & M. Schlumberger, 1995. "Persistent profitability of technical analysis on foreign exchange markets?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 48(193), pages 189-215.
  10. Blake LeBaron, 1994. "Technical Trading Rule Profitability and Foreign Exchange Intervention," International Finance 9411002, EconWPA.
  11. Takatoshi Ito & V. Vance Roley, 1986. "News from the U. S. and Japan: Which Moves the Yen/Dollar Exchange Rate?," NBER Working Papers 1853, National Bureau of Economic Research, Inc.
  12. Vitale, Paolo, 1999. "Sterilised central bank intervention in the foreign exchange market," Journal of International Economics, Elsevier, vol. 49(2), pages 245-267, December.
  13. Stephan Schulmeister, 1988. "Currency speculation and dollar fluctuations," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 41(167), pages 343-365.
  14. 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.
  15. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
  16. Tabellini, Guido, 1987. "Secrecy of Monetary Policy and the Variability of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 425-36, November.
  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.
  18. Black, Fischer, 1986. " Noise," Journal of Finance, American Finance Association, vol. 41(3), pages 529-43, July.
  19. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  20. 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.
  21. 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.
  22. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September.
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