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Noise Momentum Around the World

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  • Charlie X. Cai
  • Robert Faff
  • Yongcheol Shin

Abstract

We argue that arbitrageurs will strategically limit their initial investment in an arbitrage opportunity in anticipation of further mispricing caused by the deepening of noise traders' misperceptions. Such ‘noise momentum’ is an important determinant of the overall arbitrage process. We design an empirical strategy to capture noise momentum in a two‐period generalized error correction model. Applying it to a wide range of international spot‐futures market pairs, we document pervasive evidence of noise momentum around the world.

Suggested Citation

  • Charlie X. Cai & Robert Faff & Yongcheol Shin, 2018. "Noise Momentum Around the World," Abacus, Accounting Foundation, University of Sydney, vol. 54(1), pages 79-104, March.
    • Handle: RePEc:bla:abacus:v:54:y:2018:i:1:p:79-104
    DOI: 10.1111/abac.12101
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    Cited by:

    1. Jingzhi Chen & Charlie X. Cai & Robert Faff & Yongcheol Shin, 2022. "Nonlinear limits to arbitrage," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(6), pages 1084-1113, June.
    2. Nartea, Gilbert V. & Bai, Hengyu & Wu, Ji, 2020. "Investor sentiment and the economic policy uncertainty premium," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    3. Stewart Jones & Nurul Alam, 2019. "A machine learning analysis of citation impact among selected Pacific Basin journals," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(4), pages 2509-2552, December.

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