Smart Money, Noise Trading and Stock Price Behaviour
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CitationCampbell, John Y., and Albert S. Kyle. 1993. Smart money, noise trading and stock price behaviour. Review of Economic Studies 60, no. 1: 1-34.
AbstractThis paper estimates an equilibrium model of stock price behaviour in which changes in exponentially de-trended dividends and prices are normally distributed and exogenous "noise traders" interact with "smart-money" investors who have constant absolute risk aversion. The model can explain the volatility and predictability of U.S. stock returns in the period 1871-1986 using either a low discount rate (4% or below) and a large constant risk discount on the stock price, or a higher discount rate (5% or above) and noise trading correlated with fundamentals. The data are not well able to distinguish between these explanations.
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