Noise Trader Risk and Wealth Effect: A Theoretical Framework

Cong Chen, Changsheng Hu and Hongxing Yao ()
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Cong Chen: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Changsheng Hu: Economics and Management School, Wuhan University, Wuhan 430072, China
Hongxing Yao: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China

Mathematics, 2022, vol. 10, issue 20, 1-18

Abstract: This paper discusses the impact of noise trader risk on total consumption and investor consumption. The model predicts that: (1) If noise traders show optimistic beliefs, they will have a restraining effect on the total consumption when the noise trading intensity is high enough, they will expand consumption at t = 1 and reduce consumption at t = 2, and rational investors will reduce consumption at t = 1 and expand consumption at t = 2; (2) if the beliefs of noise traders do not show bias, the consumption of rational investors is always higher than that of noise traders and exceeds the market benchmark; (3) the relative consumption of rational investors and noise traders depends on the risk, risk aversion, fundamental risk and market ratio of noise traders; (4) based on the reasonable range of noise traders’ beliefs, the lifetime consumption of noise traders will be higher than that of rational investors and the market, and the excess consumption will change with a series of parameters.

Keywords: investor sentiment; noise trader risk; welfare level; real economy (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
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