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Do noise traders influence stock prices?

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  • Morgan Kelly

Abstract

This paper tests a smart money-noise trader model directly by comparing its predictions with the behavior of actual investors. It assumes that individual probability of being a noise trader is diminishing in income, high-income households are smart money, lower-income households are noise traders with passive investors in between. Market data behave as predicted: high participation by the general population is a negative predictor of one-year returns, and is associated with law participation by very high-income groups. The implications for the equity premium puzzle of the low returns earned by noise traders are discussed.

Suggested Citation

  • Morgan Kelly, 1997. "Do noise traders influence stock prices?," Open Access publications 10197/520, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:oapubs:10197/520
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    File URL: http://hdl.handle.net/10197/520
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    References listed on IDEAS

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    Cited by:

    1. Cizek, P., 2007. "General Trimmed Estimation : Robust Approach to Nonlinear and Limited Dependent Variable Models (Replaces DP 2007-1)," Other publications TiSEM eeccf622-dd18-41d4-a2f9-b, Tilburg University, School of Economics and Management.
    2. Čížek, Pavel, 2008. "General Trimmed Estimation: Robust Approach To Nonlinear And Limited Dependent Variable Models," Econometric Theory, Cambridge University Press, vol. 24(6), pages 1500-1529, December.
    3. Lee, Wayne Y. & Jiang, Christine X. & Indro, Daniel C., 2002. "Stock market volatility, excess returns, and the role of investor sentiment," Journal of Banking & Finance, Elsevier, vol. 26(12), pages 2277-2299.
    4. Al-Nasseri, Alya & Menla Ali, Faek & Tucker, Allan, 2021. "Investor sentiment and the dispersion of stock returns: Evidence based on the social network of investors," International Review of Financial Analysis, Elsevier, vol. 78(C).
    5. Kelly, Morgan, 1997. "Do Noise Traders Influence Stock Prices?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 351-363, August.
    6. Bohl, Martin T. & Schuppli, Michael & Siklos, Pierre L., 2010. "Stock return seasonalities and investor structure: Evidence from China's B-share markets," China Economic Review, Elsevier, vol. 21(1), pages 190-201, March.
    7. Chen, Zhenhua & Liu, Zhenya & Teka, Hanen & Zhang, Yifan, 2022. "Smart money in China's A-share market: Evidence from big data," Research in International Business and Finance, Elsevier, vol. 61(C).
    8. Cizek, P., 2004. "Asymptotics of Least Trimmed Squares Regression," Discussion Paper 2004-72, Tilburg University, Center for Economic Research.
    9. Kling, Gerhard & Gao, Lei, 2008. "Chinese institutional investors' sentiment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 374-387, October.
    10. Pavlo Blavatskyy & Ganna Pogrebna, 2010. "Reevaluating evidence on myopic loss aversion: aggregate patterns versus individual choices," Theory and Decision, Springer, vol. 68(1), pages 159-171, February.

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    More about this item

    Keywords

    Stocks--prices; Investment analysis; Financial performance; Stock exchanges & current events; Capitalists and financiers; Individual investors; Rate of return;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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