Noise Trader


Also found in: Wikipedia.

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.
Mentioned in ?
References in periodicals archive ?
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 irrationality.
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 losses.
2) In addition, brokers offset noise trades, thereby increasing noise trader losses.
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 risk.
For example, he explains how the mispricing of closed-end funds is the logical consequence of arbitrage limited by noise trader risk.
To hedge endowment risk, each noise trader demands [z.
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.