Chasing Noise

Brock Mendel and Andrei Shleifer

No 16042, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a simple model in which rational but uninformed traders occasionally chase noise as if it were information, thereby amplifying sentiment shocks and moving prices away from fundamental values. We fill a theoretical gap in the literature by showing conditions under which noise traders can have an impact on market equilibrium disproportionate to their size in the market. The model offers a partial explanation for the surprisingly low market price of financial risk in the Spring of 2007.

JEL-codes: G01 G14 (search for similar items in EconPapers)
Date: 2010-05
Note: AP CF
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Published as Mendel, Brock & Shleifer, Andrei, 2012. "Chasing noise," Journal of Financial Economics, Elsevier, vol. 104(2), pages 303-320.

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Journal Article: Chasing noise (2012)
Working Paper: Chasing Noise (2012)
Working Paper: Chasing Noise
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