TITLE : [Economic Papers 5-2]
          Noise Trading in the Korean Foreign Exchange Market:
          Some Questionnaire Evidence
AUTHOR : Changmo Ahn, Eung-Baek Lee and Euy-Hoon Suh
CONTACT : Institute for Monetary & Economic Research
             (tel: 82-2-759-5407, 5421 fax: 82-2-759-5410)
ATTACH : EP5-2-07.pdf

Summary:

  This paper examines the implications of noise trading (the Shleifer- Summers-Men-khoff hypotheses) in the interbank foreign market in Korea, using the survey method. The results confirm that the noise trader approach is widely accepted and its implications are strongly supported in Korea. Firstly, noise trading appears to be widely and repeatedly used. Traders appear to favor noise trading rather than fundamental one, with 72 percent of the respondents being classified as noise traders. Secondly, the implication of the efficient market hypothesis that noise traders will be eliminated because of their inferior strategy receives little support. Thirdly, the implication that noise trading would be a second-best strategy, which is easier and cheaper to use, is not supported. Finally, noise trading appears to be used because of its self-fulfilling character to some extent.
  To be successful in the Korean foreign exchange market, it is important to employ not only fundamental but also noise information such as technical analysis, trading volume, positions already held, investor sentiment, advice of opinion leaders and statement of government officials.