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Can Noise Traders Survive? Evidence from Closed-End Funds

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  • Seha M. Tinic
  • Laura Straks
  • Richard W. Sias

Abstract

This study presents the results of the first direct empirical tests of the De Long, Schleifer, Summers, and Waldmann noise trader model. The two key propositions of the model are that: (1) noise trader risk is systematic and (2) it is priced in the market. The results presented in this paper do not provide support for either of these propositions. The risk associated with fluctuations in closed-end fund discounts or premiums is, to a large extent, diversifiable and investors who hold closed-end funds do not earn an additional risk premium for shouldering the so-called “noise trader risk.” Furthermore, our results suggest that noise traders are driven from the market by rational investors who trade against them. We also do not find a significant relation between proxies for individual investor sentiment and closed-end fund discounts.

Suggested Citation

  • Seha M. Tinic & Laura Straks & Richard W. Sias, 1997. "Can Noise Traders Survive? Evidence from Closed-End Funds," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 1(1), pages 37-82.
    • Handle: RePEc:bor:iserev:v:1:y:1997:i:1:p:37-82
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    Cited by:

    1. Crystal Lin & Hamid Rahman & Kenneth Yung, 2009. "Investor Sentiment and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 39(4), pages 450-471, November.
    2. Cerruti, Gianluca & Lombardini, Simone, 2022. "Financial bubbles as a recursive process lead by short-term strategies," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 555-568.

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