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

Binswanger Mathias ()
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Binswanger Mathias: Hochschule für Wirtschaft in Ölten, Fachhochschule Nordwestschweiz, 4600 Ölten, Schweiz und Universität St. Gallen, 9000 St. Gallen, Switzerland.

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.; Noise trading; speculative bubbles; stock market; overlapping generations economy. (search for similar items in EconPapers)
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:jns:jbstat:v:219:y:1999:i:5-6:p:556-574:n:1004

DOI: 10.1515/jbnst-1999-5-619

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