Noise Trader Risk in Financial Markets

J Bradford De Long, Andrei Shleifer, Lawrence H. Summers and Robert Waldmann ()
Authors registered in the RePEc Author Service: James Bradford DeLong ()

Journal of Political Economy, 1990, vol. 98, issue 4, 703-38

Abstract: The authors present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders' beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than rational investors do. The model sheds light on a number of financial anomalies. Copyright 1990 by University of Chicago Press.

Date: 1990
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Working Paper: Noise Trader Risk in Financial Markets (1990)
Working Paper: Noise Trader Risk in Financial Markets
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:98:y:1990:i:4:p:703-38

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