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Revisiting noise—Fischer Black’s noise at the time of high-frequency trading

Author

Listed:
  • Gianluca P. M. Virgilio

    (Universidad Católica Sedes Sapientiae)

  • Manuel Ernesto Paz López

    (Universidad Nacional de Tumbes)

Abstract

Economists have analyzed noise trading from various viewpoints in the past, and they drew the most diverse conclusions. Noise trading has been interpreted as a facilitator of market liquidity, as a source of inefficiency, as a driver of easy money for more informed traders or for herds of uninformed ones. However, in an environment populated by High-Frequency traders, most financial theories need to be revisited, the theory about noise trading being one of them. By making use of a computer-based Agent-Based Model, this paper creates a scenario where a shock breaks the equilibrium and only some market participants receive, and act upon, such information. The results are that old-fashioned parameters, as informedness, arbitrage, market efficiency and herding behavior no longer carry the same meaning as they used to. The focus shifts from searching the mythical ‘true value’ of a security to executing orders with the shortest possible latency, to exploit trading opportunities and maximize profits.

Suggested Citation

  • Gianluca P. M. Virgilio & Manuel Ernesto Paz López, 2024. "Revisiting noise—Fischer Black’s noise at the time of high-frequency trading," Risk Management, Palgrave Macmillan, vol. 26(4), pages 1-22, December.
    • Handle: RePEc:pal:risman:v:26:y:2024:i:4:d:10.1057_s41283-024-00151-7
    DOI: 10.1057/s41283-024-00151-7
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    References listed on IDEAS

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    More about this item

    Keywords

    Noise trading; High-frequency trading; Market efficiency; Behavioral finance; Herding behavior;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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