02013cam a22002417 4500001000600000003000500006005001700011008004100028100002200069245011600091260006600207490005100273500001800324520104900342530006101391538007201452538003601524700002001560710004201580830008601622856003701708856002601745t0071NBER20140710021654.0140710s1988 mau||||fs|||| 000 0 eng d1 aCampbell, John Y.10aSmart Money, Noise Trading and Stock Price Behaviorh[electronic resource] /cJohn Y. Campbell, Albert S. Kyle. aCambridge, Mass.bNational Bureau of Economic Researchc1988.1 aNBER technical working paper seriesvno. t0071 aOctober 1988.3 aThis paper derives and estimates an equilibrium model of stock price behavior in which exogenous "noise traders" interact with risk-averse "smart money" investors. The model assumes that changes in exponentially detrended dividends and prices are normally distributed, and that smart money investors have constant absolute risk aversion. In equilibrium, the stock price is the present value of expected dividends, discounted at the riskless interest rate, less a constant risk premium, plus a term which is due to noise trading. The model expresses both stock prices and dividends as sums of unobserved components in continuous time. The model is able to explain the volatility and predictability of U.S. stock returns in the period 1871-1986 in either of two ways. Either the discount rate is 4% or below, and the constant risk premium is large; or the discount rate is 5% or above, and noise trading, correlated with fundamentals, increases the volatility of stock prices. The data are not well able to distinguish between these explanations. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.1 aKyle, Albert S.2 aNational Bureau of Economic Research. 0aTechnical Working Paper Series (National Bureau of Economic Research)vno. t0071.4 uhttp://www.nber.org/papers/t0071 uurn:doi:10.3386/t0071