A greater proportion of unsophisticated retail traders in lottery stocks means greater noise trader
risk and thus higher arbitrage risk.
Waldmann, 1990, "Noise Trader
Risk in Financial Markets," Journal of Political Economy, 98, 703-738.
Waldmann, "Noise Trader
Risk in Financial Markets" Journal of Political Economy 98, pp.
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.
risk similarly reduces arbitrage effectiveness because arbitrageurs bear the risk that noise traders
will continue to be irrational, therefore maintaining, or even increasing, the mispricing.
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.
(2) In addition, brokers offset noise trades, thereby increasing noise trader
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
For example, he explains how the mispricing of closed-end funds is the logical consequence of arbitrage limited by noise trader
(35) An analogy may be drawn to the "noise trader