risk reflects the risk that the investor population of a given stock is dominated by irrational noise traders
who contribute to a stock's deviation from fundamental value.
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.
Grossman and Stiglitz (1980) instead introduced into these models "noise traders
"--traders whose trades are motivated by some consideration other than profit maximization, such as liquidity.
The other views foreign investors as having a positive effect on the market by increasing the information flow to the market and reducing the impact of noise traders
on price volatility.
The trade characteristics of informed versus noise traders
are of great research interest.
From the perspective of noise trading, several researchers used the agent-based modeling method to analyze the survival problem in the long run by comparing the specialists and the noise traders
and the noise traders
and BSV investors, respectively [8-10].
traders and noise traders
are not the same, however, because a noise
Early behavioral models emphasized a distinction between "noise traders
" and sophisticated arbitrageurs, the former trading randomly and creating profits for the latter.
It is argued that incentives exist for skillful, rational speculators to compete against noise traders
, and that these speculators are the marginal, price-setting investors (Friedman (1953), and Fama (1965)).
The final group is noise traders
, who act irrationally, falsely believing that they possess some valuable informational advantage or superior trading skills.
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.g., as bullishness rises, more noise traders
enter the market and increase market volatility.
Individuals whose decisions are subject to one or more of those biases, referred to in the literature as "noise traders
," make investment decisions that deviate from those that theory would predict of rational investors.