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Smart Money, Noise Trading and Stock Price Behaviour

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  • Kyle, Albert
  • Campbell, John

Abstract

This 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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File URL: http://dash.harvard.edu/bitstream/handle/1/3208217/campbell_smartnoise.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3208217.

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Date of creation: 1993
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Publication status: Published in Review of Economic Studies
Handle: RePEc:hrv:faseco:3208217

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