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Listening to the noise: On price efficiency with dynamic trading

Author

Listed:
  • Arnold, Lutz
  • Russ, David

Abstract

This paper shows that, in the canonical dynamic rational expectations equilibrium model, public information about future noise trading is potentially detrimental to contemporaneous price efficiency. Our result supports concerns that social sentiment investing, sparked by growing availability of big data and advances in the way of processing it, exacerbates, rather than ameliorates, the negative impact of noise trading on price efficiency.

Suggested Citation

  • Arnold, Lutz & Russ, David, 2024. "Listening to the noise: On price efficiency with dynamic trading," Discussion Papers 19/2024, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:299241
    as

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    File URL: https://www.econstor.eu/bitstream/10419/299241/1/1892358735.pdf
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    References listed on IDEAS

    as
    1. Li, Jinfang, 2022. "The sentiment pricing dynamics with short-term and long-term learning," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    2. Eaton, Gregory W. & Green, T. Clifton & Roseman, Brian S. & Wu, Yanbin, 2022. "Retail trader sophistication and stock market quality: Evidence from brokerage outages," Journal of Financial Economics, Elsevier, vol. 146(2), pages 502-528.
    3. Manzano, Carolina & Vives, Xavier, 2011. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 346-369.
    4. Winkler, Julian & Semenova, Valentina, 2021. "Reddit's self-organised bull runs: Social contagion and asset prices," INET Oxford Working Papers 2021-04, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, revised May 2021.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    social sentiment investing; price efficiency; noise trading; information aggregation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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