Can Noise Traders Cause Persistent Deviations from Fundamental Values on the Stock Market? / Können Noise Trader langfristige Abweichungen der Aktienkurse von ihren Fundamentalwerten bewirken?

Mathias Binswanger

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 1999, vol. 219, issue 5-6, 556-574

Abstract: Models which are built on the assumption of rational expectations can easily outline the conditions under which bubbles may exist but they remain silent on the factors that cause the price to deviate from the fundamental value. In this paper it is argued that dynamic extensions of the noise trader model of De Long et al. (1990a) may provide a behavioral explanation of persistent deviations of stock prices from their fundamental value if changing fundamentals and especially fundamental shocks are included. As a consequence the pattern and the sustainability of bubbles also depend on noise traders’ reaction to fundamental shocks. In the multi period extension of the noise trader model developed in the paper noise traders’ behavior is captured by two components. First, there is a fundamentally unwarranted optimism about the future development of dividends independent of the recent development of fundamentals. Second, noise traders overreact to an average of recent dividend shocks, which results in waves of optimism or pessimism that create high price volatility. The model shows that sustainable bubbles are slowly growing, while large overreactions to fundamental shocks will result in fast growing but frequently bursting bubbles.

Keywords: Noise trading; speculative bubbles; stock market; overlapping generations economy.; Spekulative Blasen; Börse. (search for similar items in EconPapers)
Date: 1999
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.degruyter.com/view/j/jbnst.1999.219.is ... 5-604.xml?format=INT (text/html)

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:jns:jbstat:v:219:y:1999:i:5-6:p:556-574

DOI: 10.1515/jbnst-1999-5-619

Access Statistics for this article

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik) is currently edited by Peter Winker

More articles in Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik) from De Gruyter
Bibliographic data for series maintained by Peter Golla ().