Noise Trader Sentiment and Futures Price Behavior: An Empirical Investigation

Dwight R. Sanders and Scott H. Irwin

No 285700, 1981-1999 Conference Archive from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: The noise trader sentiment model of DeLong, Shleifer, Summers, and Waldman (1990a) is applied to futures markets. The theoretical results predict that overly optimistic (pessimistic) noise traders result in market prices that are greater (less) than fundamental value. Thus, returns can be predicted using the level of noise trader sentiment. The null rational expectations hypothesis is tested against the noise trader alternative using a commercial market sentiment index as a proxy for noise trader sentiment. Fama-MacBeth cross-sectional regressions test if noise traders create a systematic bias in futures prices. The time-series predictability of futures returns using known sentiment levels is tested in a Cumby-Modest market timing framework and a more general causality specification. The empirical results suggest that noise traders do not create a systematic bias in futures prices, and market returns are not predictable using the level of noise trader sentiment.

Keywords: Marketing (search for similar items in EconPapers)
Date: 1997-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:nc8191:285700

DOI: 10.22004/ag.econ.285700

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