Revisiting noise—Fischer Black’s noise at the time of high-frequency trading

Gianluca P. M. Virgilio () and Manuel Ernesto Paz López ()
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Gianluca P. M. Virgilio: Universidad Católica Sedes Sapientiae
Manuel Ernesto Paz López: Universidad Nacional de Tumbes

Risk Management, 2024, vol. 26, issue 4, No 4, 22 pages

Abstract: Abstract Economists have analyzed noise trading from various viewpoints in the past, and they drew the most diverse conclusions. Noise trading has been interpreted as a facilitator of market liquidity, as a source of inefficiency, as a driver of easy money for more informed traders or for herds of uninformed ones. However, in an environment populated by High-Frequency traders, most financial theories need to be revisited, the theory about noise trading being one of them. By making use of a computer-based Agent-Based Model, this paper creates a scenario where a shock breaks the equilibrium and only some market participants receive, and act upon, such information. The results are that old-fashioned parameters, as informedness, arbitrage, market efficiency and herding behavior no longer carry the same meaning as they used to. The focus shifts from searching the mythical ‘true value’ of a security to executing orders with the shortest possible latency, to exploit trading opportunities and maximize profits.

Keywords: Noise trading; High-frequency trading; Market efficiency; Behavioral finance; Herding behavior (search for similar items in EconPapers)
JEL-codes: G02 G14 G17 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41283-024-00151-7

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