Chasing Noise

Brock Mendel, Andrei Shleifer

NBER Working Paper No. 16042
Issued in May 2010
NBER Program(s):   AP   CF

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.

(761 K)

Published: Mendel, Brock & Shleifer, Andrei, 2012. "Chasing noise," Journal of Financial Economics, Elsevier, vol. 104(2), pages 303-320.

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Acknowledgments

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