Publication: The Size and Incidence of the Losses from Noise Trading
Open/View Files
Date
1989
Published Version
Journal Title
Journal ISSN
Volume Title
Publisher
Wiley-Blackwell
The Harvard community has made this article openly available. Please share how this access benefits you.
Citation
De Long, J., J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann. 1989. “The Size and Incidence of the Losses from Noise Trading.” The Journal of Finance 44 (3) (July): 681–696. Portico. doi:10.1111/j.1540-6261.1989.tb04385.x.
Research Data
Abstract
Recent empirical research has identified a significant amount of volatility in stock prices that cannot be easily explained by changes in fundamentals; one interpretation is that asset prices respond not only to news but also to irrational "noise trading." We assess the welfare effects and incidence of such noise trading using an overlapping-generations model that gives investors short horizons. We find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and we show that part of that cost may be borne by rational investors. We conclude that the welfare costs of noise trading may be large if the magnitude of noise in aggregate stock prices is as large as suggested by some of the recent empirical literature on the excess volatility of the market.
Description
Other Available Sources
Keywords
Terms of Use
This article is made available under the terms and conditions applicable to Other Posted Material (LAA), as set forth at Terms of Service