Noise Trading and Asset Pricing Factors

Shiyang Huang (), Yang Song () and Hong Xiang ()
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Shiyang Huang: Faculty of Business and Economics, The University of Hong Kong, Hong Kong
Yang Song: Foster School of Business, University of Washington, Seattle, Washington 98195
Hong Xiang: School of Accounting and Finance, Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Hong Kong

Management Science, 2025, vol. 71, issue 8, 6961-6978

Abstract: We demonstrate that a broad set of asset pricing factors/anomalies are significantly exposed to “noise trader risk,” and the noise trader risk is priced in factor premia. We first confirm that mutual funds’ flow-induced trading of factors are uninformed, as they generate a large price impact on factor returns, followed by a complete reversal. We then show that asset pricing factors are subject to flow-driven noise trader risk in that expected variation (covariation) of flow-induced noise trading strongly forecasts variance (covariance) of factor returns. Importantly, factor premia are higher when flow-driven noise trader risk is expected to be more salient.

Keywords: noise trader risk; factor premia; anomaly (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:8:p:6961-6978

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