Noise Trader

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Noise Trader

A trader that makes investment decisions based on perceived market movements rather than a security's fundamentals. Put simply, a noise trader buys when everyone else seems to be buying and sells when everyone else seems to be selling. Behavioral economists classify most traders as noise traders, though few investors admit to it. Interestingly, behavioral economists classify all technical information as noise, though not all investors do so.
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As their name suggests, a key feature of noise traders is that their impact is random, which makes the price of the asset a noisy signal among all the aggregate information agents receive.
The trade characteristics of informed versus noise traders are of great research interest.
traders and noise traders are not the same, however, because a noise
Recent literature has argued that institutional investors act as arbitrageurs, while the household sector as a whole may play the role of noise traders.
Hence, noise traders become a source of risk in the finanical markets.
One way this might occur is if the presence of noise traders (see, for example, Black, 1986; De Long et al, 1990) in the market waxes and wanes with the extent of their over-optimism, e.
First, the biases held by the noise traders must be more or less consistent; otherwise, at least some of the biases will regress out.
In addition to these two types of individuals, there are noise traders who have wealth to invest but who misperceive the asset's intrinsic value.
I assume that markets are not efficient in the sense that smart money is costly so that the mispricing caused by noise traders is not completely removed.
In particular, given that the actions of noise traders may lead to greater fundamental mispricing of an asset, perceived deviations of asset prices from their fundamental values represent risky arbitrage opportunities, as in Shleifer and Summers (1990).
The customers need to trade in asset-backed securities to hedge endowment risks, similar to those described for noise traders.
Or, are they simply wealth transfers from noise traders to arbitrageurs?