Informed arbitrage with speculative noise trading

F. Albert Wang

Journal of Banking & Finance, 2010, vol. 34, issue 2, 304-313

Abstract: We consider speculative noise trading when some naïve speculators trade on noise as if it were information [Black, F., 1986. Noise. Journal of Finance 41, 529-543]. We examine the optimal trading strategy of an informed investor who faces such naïve speculators in the market. We find that the informed investor trades aggressively on her information and takes large, opposite positions against the naïve speculators. The trading volume is thereby drastically magnified. While such speculative noise trading enhances liquidity, it makes prices less efficient. The overall dynamic patterns that emerge from our model are most consistent with the evidence for interday variations in volume, volatility, and transaction costs.

Keywords: Informed; trading; Noise; trading; Asymmetric; information; Heterogeneous; prior; beliefs; Liquidity; Volume; Volatility; Transaction; costs (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00179-4
Full text for ScienceDirect subscribers only

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:eee:jbfina:v:34:y:2010:i:2:p:304-313

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().