EconPapers    
Economics at your fingertips  
 

Noise Trading and the Management of Operational Risk; Firms, Traders and Irrationality in Financial Markets*

Paul Willman, Mark Fenton‐O'Creevy, Nigel Nicholson and Emma Soane

Journal of Management Studies, 2006, vol. 43, issue 6, 1357-1374

Abstract: abstract Efficient market models cannot explain the high level of trading in financial markets in terms of asset portfolio adjustment. It is presumed that much of this excessive trading is irrational ‘noise’ trading. A corollary is that there must either be irrational traders in the market or rational traders with irrational aberrations. The paper reviews the various attempts to explain noise trading in the finance literature, concluding that the persistence of irrationality is not well explained. Data from a study of 118 traders in four large investment banks are presented to advance reasons why traders might seek to trade more frequently than financial models predict. The argument is advanced that trades do not simply occur in order to generate profit, but it does not follow that such trading is irrational. Trading may generate information, accelerate learning, create commitments and enhance social capital, all of which sustain traders' long term survival in the market. The paper treats noise trading as a form of operational risk facing firms operating in financial markets and discusses approaches to the management of such risk.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.1111/j.1467-6486.2006.00648.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jomstd:v:43:y:2006:i:6:p:1357-1374

Ordering information: This journal article can be ordered from
http://www.blackwell ... s.asp?ref=00022-2380

Access Statistics for this article

Journal of Management Studies is currently edited by Timothy Clark, Steven W. Floyd and Mike Wright

More articles in Journal of Management Studies from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2019-08-08
Handle: RePEc:bla:jomstd:v:43:y:2006:i:6:p:1357-1374