Noise Trader Risk in Financial Markets

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Noise Trader Risk in Financial Markets

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Title: Noise Trader Risk in Financial Markets
Author: De Long, J. Bradford; Shleifer, Andrei; Summers, Lawrence H.; Waldmann, Robert J.

Note: Order does not necessarily reflect citation order of authors.

Citation: De Long, J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann. 1990. Noise trader risk in financial markets. Journal of Political Economy 98(4): 703-738.
Access Status: At the direction of the depositing author this work is not currently accessible through DASH.
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Abstract: We present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders' beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than rational investors do. The model sheds light on a number of financial anomalies, including the excess volatility of asset prices, the mean reversion of stock returns, the underpricing of closed-end mutual funds, and the Mehra-Prescott equity premium puzzle.
Published Version: http://dx.doi.org/10.1086/261703
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3725552

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  • FAS Scholarly Articles [6902]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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