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A Theory of Noise Trading in Securities Markets

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  • 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.

Suggested Citation

  • Trueman, Brett, 1988. " A Theory of Noise Trading in Securities Markets," Journal of Finance, American Finance Association, vol. 43(1), pages 83-95, March.
  • Handle: RePEc:bla:jfinan:v:43:y:1988:i:1:p:83-95
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    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", pages 125-132.
    8. Startz, Richard, 1982. "Do forecast errors or term premia really make the difference between long and short rates?," Journal of Financial Economics, Elsevier, pages 323-329.
    9. Jones, David S. & Vance Roley, V., 1983. "Rational expectations and the expectations model of the term structure : A test using weekly data," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 453-465, September.
    10. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
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    Cited by:

    1. Wojciech Olszewski & Alvaro Sandroni, 2008. "Manipulability of Future-Independent Tests," Econometrica, Econometric Society, vol. 76(6), pages 1437-1466, November.
    2. Gizelis, Demetrios & Chowdhury, Shah, 2016. "Investor Sentiment and Stock Returns: Evidence from the Athens Stock Exchange," MPRA Paper 71243, University Library of Munich, Germany.
    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, pages 71-96.
    4. Dow, James & Gorton, Gary, 1997. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1024-1050, October.
    5. Aggarwal, Raj & Gruca, Edward, 1993. "Intraday Trading Patterns in the Equity Options Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, pages 285-297.
    6. Verma, Rahul & Soydemir, Gökçe, 2009. "The impact of individual and institutional investor sentiment on the market price of risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1129-1145, August.
    7. Hu, Zongyi & Li, Chao, 2015. "Investor Sentiment and Irrational Speculative Bubble Model," MPRA Paper 62108, University Library of Munich, Germany.
    8. Golec, Joseph, 1997. "Herding on Noise: The Case of Johnson Redbook's Weekly Retail Sales Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 367-381, September.
    9. Hsu, Chih-Hsiang, 2016. "Strategic noise trading of later-informed traders in a multi-market framework," Economic Modelling, Elsevier, vol. 54(C), pages 235-243.
    10. Andrea Prat & Amil Dasgupta, 2004. "Career Concerns in Financial Markets," FMG Discussion Papers dp494, Financial Markets Group.
    11. Lucy Ackert & Marie Racine, 1997. "The economics of conditional heteroskedasticity: Evidence from canadian and U.S. stock and futures markets," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(4), pages 371-385, December.
    12. Dasgupta, Amil & Prat, Andrea, 2003. "Trading Volume with Career Concerns," CEPR Discussion Papers 4034, C.E.P.R. Discussion Papers.
    13. repec:eee:spacre:v:18:y:2015:i:1:p:78-86 is not listed on IDEAS
    14. Pablo Calafiore & Gökçe Soydemir & Rahul Verma, 2010. "The Impact of Business and Consumer Sentiment on Stock Market Returns: Evidence from Brazil," Chapters,in: Handbook of Behavioral Finance, chapter 18 Edward Elgar Publishing.
    15. Pacces, Alessio M., 2000. "Financial intermediation in the securities markets law and economics of conduct of business regulation," International Review of Law and Economics, Elsevier, vol. 20(4), pages 479-510, December.
    16. Gleason, Kimberly C. & Mathur, Ike & Peterson, Mark A., 2004. "Analysis of intraday herding behavior among the sector ETFs," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 681-694, December.
    17. Scotti, Massimo, 2012. "Delegated portfolio management with career concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 84(3), pages 829-839.

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