THE EFFICTEVENESS OF ICELAND CENTRAL BANK INTERVENTION THROUGH THE NOISE TRADING CHANNEL BEFORE AND DURING FINANCIAL CRISIS1

• Main Authors: Abderrazek Ben Maatoug, Ibrahim Fatnassi, Abdelwahed Omri
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Subjects: Central bank intervention; noise trading channel; logit and probit; microstrucutre; financial crisis; Iceland
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.476.8242; http://www.opf.slu.cz/kfi/icfb/proc2009/pdf/22_Maatoug.pdf

In this paper we explore the effectiveness of the sterilized central bank interventions through the noise trading channel. This study is conducted for the Central Bank of Iceland’s case before and after the financial crisis. The noise trading channel assumes that noise traders must prevail the foreign exchange market and the exchange rate is determined by flow market equilibrium. Once these hypotheses are satisfied, the central bank should intervene in highly volatile market periods and keep its interventions secret. We used logit and probit model in order to test whether the high market volatility leads to a higher probability of normal response of the exchange rate upon the intervention. Our findings, during the period Junuary-1999 through December-2008, are supporting the noise trading channel only for the period preceding the financial crisis and not during the financial crisis.