A renowned hypothesis about the introduction of futures markets is that noise traders
play an important role in destabilizing (in terms of enhancement of volatility) the underlying market.
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.
These results imply that increased participation of informed foreign investors in emerging futures market should enhance the rate of information flow, improve the quality and reliability of information and, hence, reduce the impact of noise traders
on price volatility.
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.
8) In light of the inability of noise traders
to promote market efficiency and the indifference of liquidity traders to accurate pricing, (9) one must narrow the list to two groups: insiders and information traders.
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.