1Day Traders, News Arrival and Exchange Rate Dynamics by

Guided by psychological evidence, we develop a simple exchange rate model in which investors ´ attention to fundamental shocks switches between two states. In calm periods, traders underweight news. However, if traders encounter a series of distinct exchange rate movements, they become excited and overreact to news. Simulations indicate that the model replicates the main stylized facts of foreign exchange markets quite well. We observe a random evolution of the exchange rate, lasting deviations from fundamentals, a pronounced volatility, fat tails for returns and significant volatility clustering. Keywords exchange rate dynamics, news arrival, market sentiment, over- and underreaction JEL Classificatio