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Noise Trading and Asset Pricing Factors

Author

Listed:
  • Shiyang Huang

    (Faculty of Business and Economics, The University of Hong Kong, Hong Kong)

  • Yang Song

    (Foster School of Business, University of Washington, Seattle, Washington 98195)

  • Hong Xiang

    (School of Accounting and Finance, Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Hong Kong)

Abstract

We demonstrate that a broad set of asset pricing factors/anomalies are significantly exposed to “noise trader risk,” and the noise trader risk is priced in factor premia. We first confirm that mutual funds’ flow-induced trading of factors are uninformed, as they generate a large price impact on factor returns, followed by a complete reversal. We then show that asset pricing factors are subject to flow-driven noise trader risk in that expected variation (covariation) of flow-induced noise trading strongly forecasts variance (covariance) of factor returns. Importantly, factor premia are higher when flow-driven noise trader risk is expected to be more salient.

Suggested Citation

  • Shiyang Huang & Yang Song & Hong Xiang, 2025. "Noise Trading and Asset Pricing Factors," Management Science, INFORMS, vol. 71(8), pages 6961-6978, August.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:8:p:6961-6978
    DOI: 10.1287/mnsc.2022.01827
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