Noise traders incarnate: Describing a realistic noise trading process

Joel Peress and Daniel Schmidt

Journal of Financial Markets, 2021, vol. 54, issue C

Abstract: We estimate a realistic process for noise trading to help theorists derive predictions from noisy rational expectations models. We characterize the trades of individual investors, who are natural candidates for the role of noise traders because their trades are weakly correlated with fundamentals, in line with how such models define noise trading. Data from a retail brokerage house, small and price-improved trades in TAQ, and flows to retail mutual funds yield consistent estimates. The properties of noise trading are highly sensitive to the frequency considered, with the common assumption of i.i.d.-normal noise appropriate only at monthly and lower frequencies.

Keywords: Noise trading; Noisy rational expectations model; Informational efficiency; Calibration; Individual investors (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Noise Traders Incarnate: Describing a Realistic Noise Trading Process (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:54:y:2021:i:c:s1386418120300872

DOI: 10.1016/j.finmar.2020.100618

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