Speculative Noise Trading and Manipulation in the Foreign Exchange Market

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.