Noise Trading and Exchange Rate Regimes 1 (original) (raw)
Related papers
The impact of FX central bank intervention in a noise trading framework
Journal of Banking & Finance, 2009
In this paper, we analyze the e¤ectiveness of the direct central bank interventions using a new e¤ectiveness criterion. To this aim, we investigate the e¤ects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We …rst estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions for explaining the switching properties between the two types of agents. We …nd evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing in ‡uence on the exchange rate.
Noise Trading and Exchange Rate Regimes
The Quarterly Journal of Economics, 2002
comments, discussion and encouragement. We also thank Alberto Alesina and two anonymous referees for their suggestions in revising the paper.
Exchange rate volatility and noise traders: Currency Transaction Tax as an eviction device
2009
The aim of the paper is to identify the impact of the currency transaction tax on the foreign exchange structure and thus its impact on exchange rate volatility. In a noise trading framework a la Jeanne and Rose (2002), we explain that the exchange rate volatility depends on fundamentals volatility and extra volatility due to the behaviour of noise traders. The exchange rate volatility is lower after introducing a Currency Transaction Tax as it increases the entry cost of noise traders and influences the range of possible equilibria. While there are multiple equilibria of exchange rate volatility without Currency Tax, there are only two aggregate exchange rate volatility corner equilibria after introducing a CTT. One of them is a low exchange rate volatility equilibrium. Moreover, we prove analytically the existence of an optimal tax rate for which the exchange rate volatility depends solely on fundamentals variance. In this case, few noise traders enter the market and there is cons...
Intervention in the Foreign Exchange Market in a Model with Noise Traders
SSRN Electronic Journal, 2003
In this paper we analyze the effectiveness of sterilized interventions in the foreign exchange market. We use a model in which chartists and fundamentalists interact. This model produces speculative noise which leads to systematic deviations of the exchange rate from its fundamentals. In such an environment, interventions can be effective in reducing the noise. It does this by reducing the profitability of noise trading.
Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics
The Economic Journal, 1999
Exchange rate regimes differ primarily by the noisiness of the exchange rate, not observable macroeconomic "fundamentals." Fixed exchange rates are typically stable and floating exchange rates are volatile, but macro phenomena are regime-independent. Fundamentals only seem to be relevant for exchange rates at low frequencies or when inflation is high. A basic task of international finance is explaining these cross-regime differences in exchange rate volatility. The evidence suggests that a switch in exchange rate policy is accompanied by a change in market structure; macroeconomic considerations are superfluous. We formalise this observation in a non-linear model with multiple equilibria.
Endogenous and Exogenous Volatility in the Foreign Exchange Market
We identify two sources of heteroskedasticity in high-frequency financial data. The first source is the endogenous changing participation of heterogeneous speculators to the market, coupled with the time varying behavior of the market maker. The second source is the exogenous flow of market relevant information. We model the first one by means of a Markov switching (MS) SVAR process, and the second one by means of a GARCH process for the MS-SVAR structural errors. Using transaction data of the EUR/USD market in 2016, we detect three regimes characterized by different levels of endogenous volatility. The impact of structural shocks on the market depends on both sources, but the exogenous information is channeled to the market mostly through price. This suggests that the market maker is better informed than the speculators, who act as momentum traders. The latter are able to profit from trade because, unlike noise traders, they respond immediately to price shocks.
Could the Exchange Rate Regime Reduce Macroeconomic Volatility
2004
This study intends to determine the kind of relationship existing between the exchange rate regime and real volatility. After carefully revising theoretical and empirical results of previous research, a new methodology is proposed that corrects deficiencies found in previous empirical papers. The results show non-neutrality of the exchange rate regime. Particularly, it is found that the more rigid the regime, the greater the real volatility. Even when a classification of the exchange rate regime is performed allowing a comparison between consistent pegging and consistent floating, the former has a higher volatility. Countries with "fear of floating" or "inability of pegging" behavior exhibit lower volatility than consistent pegs.
Carnegie-Rochester Conference Series on Public Policy, 1981
This paper is intended to accomplish two tasks. First, exchange-rate models of the sticky-price and flexible-price varieties respectively are checked for their consistency with two key empirical regularities: (1) the observed pattern of price-level vs. exchange-rate volatility, and (2) the observed pattern of spot exchange-rate vs. forward exchange-rate volatility. Second, a widely neglected reason for exchange-rate volatility, activist monetary policy is studied. It is found that both sticky-price and flexible price models explain the empirical regularities rather well. Further, if prices are sticky it is found that exchange-rate overshooting may be empirically non-trivial.
European Economic Review, 2003
In this paper, we investigate the effect of central bank interventions on the weekly returns and volatility of the DEM/USD and YEN/USD exchange rate returns. In contrast with previous analyzes, we allow for regime-dependent specifications and investigate whether official interventions can explain the observed volatility regime switches. It is found that, depending on the prevailing volatility level, coordinated central bank interventions can lead to either a stabilizing or a destabilizing effect. Our results lead us to challenge the usual view that such interventions always imply increases in volatility. JEL Classifications: C22, E44, F31, G15.
Journal of Evolutionary Economics, 2023
This paper intends to contribute to the theoretical literature on the determinants of exchange rate fluctuations. We build an agent-based model, based on behavioral assumptions inspired by the literature on behavioral finance and by empirical surveys about the behavior of foreign exchange professionals. In our artificial economy with two countries, traders can speculate on both exchange and interest rates, and allocate their wealth across heterogeneous assets. Fundamentalists use both fundamental and technical analysis, while chartists only employ the latter, and are either trend followers or trend contrarians. In our model, trend contrarians and cash in mechanisms provide the sufficient stability conditions, and allow explaining and replicating most stylized facts of foreign exchange markets, namely (i) the excess volatility of the exchange rate with respect to its fundamentals, (ii) booms, busts and precarious equilibria, (iii) clusters of volatility, (iv) long memory and (v) fat tails.