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Noise traders incarnate: Describing a realistic noise trading process

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  • Peress, Joel
  • Schmidt, Daniel

Abstract

We estimate a realistic process for noise trading to help theorists derive predictions from noisy rational expectations models. We characterize the trades of individual investors, who are natural candidates for the role of noise traders because their trades are weakly correlated with fundamentals, in line with how such models define noise trading. Data from a retail brokerage house, small and price-improved trades in TAQ, and flows to retail mutual funds yield consistent estimates. The properties of noise trading are highly sensitive to the frequency considered, with the common assumption of i.i.d.-normal noise appropriate only at monthly and lower frequencies.

Suggested Citation

  • Peress, Joel & Schmidt, Daniel, 2021. "Noise traders incarnate: Describing a realistic noise trading process," Journal of Financial Markets, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finmar:v:54:y:2021:i:c:s1386418120300872
    DOI: 10.1016/j.finmar.2020.100618
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    More about this item

    Keywords

    Noise trading; Noisy rational expectations model; Informational efficiency; Calibration; Individual investors;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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