Noise Trading Channel and Timing of Effective Central Bank Intervention

This study is to test if sterilized intervention by central banks in the foreign exchange market tends to be more effective when the timing of intervention is consistent with the noise‐trading or coordination channel hypothesis. For the test, I use a three‐regime threshold model and daily data on actual intervention by US and German central banks. The main finding is that if central banks choose the optimal timing in light of the trend‐chasing behaviors of noise traders, such strategic intervention can be more effective in countering the exchange rate trend.