Noise Trading, Delegated Portfolio Management, and Economic Welfare
The authors consider a model of the stock market with delegated portfolio management. Portfolio managers try, but sometimes fail, to discover profitable trading opportunities. Although it is best not to trade in this case, their clients cannot distinguish 'actively doing nothing,' in this sense, from 'simply doing nothing.' The authors show that some portfolio managers trade even though they have no reason to prefer one asset to another (noise trade); the amount of such noise trade can be large compared to the amount of hedging volume; and, perhaps surprisingly, noise trade may be Pareto improving. Copyright 1997 by the University of Chicago.
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