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A Theory of Noise Trading in Securities Markets

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Author Info
 Trueman, Brett
Abstract

In a recent article, F. Black introduces the concept of noise trading, defin ed as trading on noise as if it were information. He asserts that suc h trading must be a significant factor in securities markets, but doe s not explain why investors would rationally trade on noise. The goal of this paper is to provide such an explanation for one type of inve stor, managers of investment funds. As shown here, the incentive to e ngage in noise trading arises because of the positive signal that the manager's trading level provides about his or her ability to collect private information about security investments. Copyright 1988 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 43 (1988)
Issue (Month): 1 (March)
Pages: 83-95
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Handle: RePEc:bla:jfinan:v:43:y:1988:i:1:p:83-95

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  1. James Dow & Gary Gorton, 1994. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Center for Financial Institutions Working Papers 95-10, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  2. Alvaro Sandroni & Wojciech Olszewski, 2008. "Manipulability of Future-Independent Tests," PIER Working Paper Archive 08-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  3. Michael Baye & Ann Gillette & Casper Vries, 1994. "Limit orders, asymmetric information, and the formation of asset prices with a computerized specialist," Journal of Economics, Springer, vol. 59(1), pages 71-96, February. [Downloadable!] (restricted)
    Other versions:
  4. Lucy Ackert & Marie Racine, 1997. "The economics of conditional heteroskedasticity: Evidence from canadian and U.S. stock and futures markets," Atlantic Economic Journal, International Atlantic Economic Society, vol. 25(4), pages 371-385, December. [Downloadable!] (restricted)
  5. Michael Brennan & Ian Dunlop, 1991. "Contributing Shares," University of California at Los Angeles, Anderson Graduate School of Management 1171, Anderson Graduate School of Management, UCLA. [Downloadable!]
  6. Pier Luigi Sacco, 1991. "Rationality And Stock Market Behavior: What Theoretical Framework (If Any?)," International Economic Journal, Korean International Economic Association, vol. 5(4), pages 17-41, December. [Downloadable!] (restricted)
  7. Dasgupta, Amil & Prat, Andrea, 2003. "Trading Volume with Career Concerns," CEPR Discussion Papers 4034, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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