IDEAS home Printed from https://ideas.repec.org/p/vas/papers/69.html
   My bibliography  Save this paper

Noise-trader Risk: Does it Deter Arbitrage, and Is it Priced?

Author

Abstract

Arbitrage positions that benefit from the reversion of closed-end fund discounts to rational levels show excess returns that increase in magnitude the more funds are mispriced. At the same time, fund trading volumes and bid-ask spreads more than double as funds become increasingly mispriced. These behaviors suggest that non-diversifiable noise-trader risk increases the more funds are mispriced and that market participants are not only aware of this unique risk factor but demand a compensatory rate of return that varies with its magnitude.

Suggested Citation

  • Flynn, Sean M., 2005. "Noise-trader Risk: Does it Deter Arbitrage, and Is it Priced?," Vassar College Department of Economics Working Paper Series 69, Vassar College Department of Economics.
    • Handle: RePEc:vas:papers:69
    as

    Download full text from publisher

    File URL: http://irving.vassar.edu/VCEWP/VCEWP69.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Garbade, Kenneth D & Silber, William L, 1979. "Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk," Journal of Finance, American Finance Association, vol. 34(3), pages 577-593, June.
    2. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-872, August.
    3. Chay, J. B. & Trzcinka, Charles A., 1999. "Managerial performance and the cross-sectional pricing of closed-end funds," Journal of Financial Economics, Elsevier, vol. 52(3), pages 379-408, June.
    4. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    5. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
    6. Sean Masaki Flynn, 2010. "Short Selling And Mispricings When Fundamentals Are Known: Evidence From Nyse‐Traded Closed‐End Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(4), pages 463-486, December.
    7. John Y. Campbell & Albert S. Kyle, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 1-34.
    8. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    10. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
    11. Peavy, John W, III, 1990. "Returns on Initial Public Offerings of Closed-End Funds," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 695-708.
    12. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    13. Elton, Edwin J & Gruber, Martin J & Busse, Jeffrey A, 1998. "Do Investors Care about Sentiment?," The Journal of Business, University of Chicago Press, vol. 71(4), pages 477-500, October.
    14. Robert Neal & Simon M. Wheatley, 1995. "How reliable are adverse selection models of the bid-ask spread?," Research Working Paper 95-02, Federal Reserve Bank of Kansas City.
    15. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
    16. Thompson, Rex, 1978. "The information content of discounts and premiums on closed-end fund shares," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 151-186.
    17. John A. Doukas & Nikolaos T. Milonas, 2004. "Investor Sentiment and the Closed-end Fund Puzzle: Out-of-sample Evidence," European Financial Management, European Financial Management Association, vol. 10(2), pages 235-266.
    18. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    19. Edwin J. Elton & Martin J. Gruber & Jeffrey A. Busse, 1998. "Do Investors Care About Sentiment?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-028, New York University, Leonard N. Stern School of Business-.
    20. Pontiff, Jeffrey, 1995. "Closed-end fund premia and returns Implications for financial market equilibrium," Journal of Financial Economics, Elsevier, vol. 37(3), pages 341-370, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vas:papers:69. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sean Flynn). General contact details of provider: http://edirc.repec.org/data/edvasus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.