Noise, equity prices, and hedging: A new approach
AbstractThe existence of noise trading in equity markets has possible economic implications for arbitrage, and asset pricing. In terms of pricing, noise trading can lead to excess volatility which has been shown to influence the value of options and futures. Furthermore, option research shows that modeling volatility leads to improved hedging performance. To this end, we derive a general hedging model for equity index futures in the presence of noise trading. Our analysis shows how the level and dynamics of noise trading should influence a hedger's behavior. Finally, we empirically test our model using the NASDAQ-100 index futures and FTSE 100 index futures over the period of January 1998 to May 2003.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Financial Analysis.
Volume (Year): 17 (2008)
Issue (Month): 5 (December)
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Web page: http://www.elsevier.com/locate/inca/620166
Hedging Noise trading Asset pricing;
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