As opposed to the conventional noise trader
theoretical framework, the sentiment formation process has been approached from an unique event perspective by several recent studies such as Garner (2002), and Burch, Emery, and Fuerst (2003), and the event of September 11, 2001 has been used as a natural test of this hypothesis.
1) This of course raises the question of who can be described as a noise trader
Summers, The Noise Trader
Approach to Finance, 4 J.
This suggests the possibility that noise trader
or other behavioural characteristics may vary over time in such a way so as to induce the pattern observed in Figure 1.
In the case of closed-end mutual funds, however, the absence of institutional investors in this niche limits the extent of corrective arbitrage, and prices retain a rational component reflecting the risk of noise trader
When past returns are poor, investors don't know for sure whether the poor returns are due to a random error (noise), a deepening of noise trader
misperception (bad luck), or truly inferior investment talent.
The social benefits of improved financial analysis may outweigh the social benefits of alleviating noise trader
2) In addition, brokers offset noise trades, thereby increasing noise trader
In recent arbitrage models developed by, inter alios, Grossman and Miller (1988), De Long, Shleifer, Summers, and Waldmann (1990) and Campbell and Kyle (1993), arbitrage is generally less than perfect because arbitrageurs face either fundamental or noise trader
For example, he explains how the mispricing of closed-end funds is the logical consequence of arbitrage limited by noise trader
To hedge endowment risk, each noise trader
In addition, once the smart money recognises the existence of noise traders
operating at a particular horizon, the smart money might try and predict future noise trader
sentiment and invest ahead of such shifts in sentiment.