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
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.
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
To hedge endowment risk, each noise trader
We find ADR return affected by noise trader
risk and increases (decreases) when investors are irrationally optimistic (pessimistic).
Consistent with Pontiff's noise trader
model, our results suggest that impediments to arbitrage explain a significant amount of mispricing in financial markets.
Morck, Yeung, and Yu propose that weak private property rights impede informed trading and increase systematic noise trader
This dilutes the impact any one noise trader
can have; therefore, noise traders
as a group have little if any net impact on prices.
In their model, a strategic but uninformed noise trader
repeatedly buys stock, causing a relatively large effect on prices.