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Chasing noise

  • Mendel, Brock
  • Shleifer, Andrei

We present a simple model in which rational but uninformed traders occasionally chase noise as if it were information, thereby amplifying sentiment shocks and moving prices away from fundamental values. In the model, noise traders can have an impact on market equilibrium disproportionate to their size in the market. The model offers a partial explanation for the surprisingly low market price of financial risk in the spring of 2007.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 104 (2012)
Issue (Month): 2 ()
Pages: 303-320

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Handle: RePEc:eee:jfinec:v:104:y:2012:i:2:p:303-320
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  1. Barlevy, Gadi & Veronesi, Pietro, 2003. "Rational panics and stock market crashes," Journal of Economic Theory, Elsevier, vol. 110(2), pages 234-263, June.
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  18. Angeletos, George-Marios & La’O, Jennifer, 2009. "Incomplete information, higher-order beliefs and price inertia," Journal of Monetary Economics, Elsevier, vol. 56(S), pages S19-S37.
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