TY  - JOUR
AU  - Mendel,Brock
AU  - Shleifer,Andrei
TI  - Chasing Noise
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16042
PY  - 2010
Y2  - May 2010
UR  - http://www.nber.org/papers/w16042
L1  - http://www.nber.org/papers/w16042.pdf
N1  - Author contact info:
Brock Mendel
Department of Economics
Harvard University
Littauer Center
Cambridge, MA 02138
E-Mail: jbmendel@fas.harvard.edu

Andrei Shleifer
Department of Economics
Harvard University
Littauer Center M-9
Cambridge, MA 02138
Tel: 617/495-5046
Fax: 617/496-1708
E-Mail: ashleifer@harvard.edu
AB  - 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.
ER  -