NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investment Noise and Trends

Robert F. Stambaugh

NBER Working Paper No. 20072
Issued in April 2014
NBER Program(s):   AP

During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as well as shifts by active managers toward lower fees and more index-like investing. I develop an equilibrium model linking these investment trends to the decline in individual ownership, interpreting the latter as a reduction in noise trading. Active management corrects most noise-trader induced mispricing, and the fraction left uncorrected shrinks as noise traders' stake in the market declines. Less mispricing then dictates a smaller footprint for active management.

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Document Object Identifier (DOI): 10.3386/w20072

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