Spontaneous Volatility: Fooled by Reflexive Randomness

Patrick Schotanus and Aaron Schurger

Journal of Behavioral Finance, 2021, vol. 22, issue 2, 201-213

Abstract: We draw a parallel between noise trading and the “readiness potential” in neuroscience. The latter can be explained in terms of neuronal noise accumulation which can tip the scale ahead of voluntary actions, in particular their timing in situations of weak evidence. This principle may apply to trading by technical noise traders. Based on our initial findings we propose that excess volatility, as a measure of price noise, indirectly reflects the signature of collective neuronal noise. In other words, we’ve potentially identified an internal contributor to Black’s “cumulative noise”, with neurons and prices reflexively participating in a joint random walk.

Date: 2021
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DOI: 10.1080/15427560.2020.1771715

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