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Noise Traders, Market Sentiment, and Futures Price Behavior


Author Info

  • Dwight R. Sanders

    (Darden Restaurants)

  • Scott H. Irwin

    (The Ohio State University)

  • Raymond M. Leuthold

    (University of Illinois, Urbana-Champaign)


The noise trader sentiment model of De Long, Shleifer, Summers, and Waldmann (1990a) is applied to futures markets. The theoretical results predict that overly optimistic (pessimistic) noise traders result in market prices that are greater (less) than fundamental value. Thus, returns can be predicted using the level of noise trader sentiment. The null rational expectations hypothesis is tested against the noise trader alternative using a commercial market sentiment index as a proxy for noise trader sentiment. Fama-MacBeth cross-sectional regressions test if noise traders create a systematic bias in futures prices. The time- series predictability of futures returns using known sentiment levels is tested in a Cumby-Modest market timing framework and a more general causality specification. The empirical results lead to the following conclusions. First, there is no evidence that noise trader sentiment creates a systematic bias in futures prices. Second, predictable market returns using noise trader sentiment is not characteristic of futures markets in general. Third, futures market returns at weekly intervals are characterized by low-order positive autocorrelation with relatively small autoregressive parameters. In those instances where there is evidence of noise trader effects, it is at best limited to isolated markets and particular specifications.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9707001.

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Length: 40 pages
Date of creation: 21 Jul 1997
Date of revision:
Handle: RePEc:wpa:wuwpfi:9707001

Note: Type of Document - Word Perfect 6/7/8; prepared on PC; to print on HP Laser Jet; pages: 40. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 97-02. For a complete list of OFOR working papers see
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Related research

Keywords: Noise Traders; Sentiment; Forecast Bias; Causality;

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  1. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September.
  2. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  3. Cumby, Robert E. & Modest, David M., 1987. "Testing for market timing ability : A framework for forecast evaluation," Journal of Financial Economics, Elsevier, vol. 19(1), pages 169-189, September.
  4. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  5. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
  6. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
  7. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "The Size and Incidence of the Losses from Noise Trading," NBER Working Papers 2875, National Bureau of Economic Research, Inc.
  8. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  9. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
  10. Virginia Grace France & Laura Kodres & James T. Moser, 1994. "A review of regulatory mechanisms to control the volatility of prices," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 15-28.
  11. Laura E. Kodres, 1994. "The existence and impact of destabilizing positive feedback traders: evidence from the S&P 500 Index futures market," Finance and Economics Discussion Series 94-9, Board of Governors of the Federal Reserve System (U.S.).
  12. Stein, Jerome L, 1981. "Speculative Price: Economic Welfare and the Idiot of Chance," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 223-32, May.
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Cited by:
  1. Wang, Changyun, 2000. "Investor sentiment and return predictability in agricultural futures markets," MPRA Paper 36425, University Library of Munich, Germany, revised Sep 2002.


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