Noise Traders, Market Sentiment, and Futures Price Behavior

Dwight R. Sanders, Scott Irwin and Raymond M. Leuthold
Additional contact information
Dwight R. Sanders: Darden Restaurants
Raymond M. Leuthold: University of Illinois, Urbana-Champaign

Finance from University Library of Munich, Germany

Abstract: The noise trader sentiment model of De Long, Shleifer, Summers, and Waldmann (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 lead to the following conclusions. First, there is no evidence that noise trader sentiment creates a systematic bias in futures prices. Second, predictable market returns using noise trader sentiment is not characteristic of futures markets in general. Third, futures market returns at weekly intervals are characterized by low-order positive autocorrelation with relatively small autoregressive parameters. In those instances where there is evidence of noise trader effects, it is at best limited to isolated markets and particular specifications.

Keywords: Noise Traders; Sentiment; Forecast Bias; Causality (search for similar items in EconPapers)
JEL-codes: G G0 G1 (search for similar items in EconPapers)
Pages: 40 pages
Date: 1997-07-21
Note: Type of Document - Word Perfect 6/7/8; prepared on PC; to print on HP Laser Jet; pages: 40. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 97-02. For a complete list of OFOR working papers see
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