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 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 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.
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.
To hedge endowment risk, each noise trader demands [z.
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 risk.
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.