Noise traders incarnate: Describing a realistic noise trading process

PurposeThe authors examine the relation between noise trading in equity markets and stochastic volatility by estimating a two-factor jump diffusion model. Their analysis shows that contemporaneous price deviations in the derivatives market are statistically significant in explaining movements in index futures prices and option-market volatility measures.Design/methodology/approachTo understand the impact noise may have in the S&P 500 derivatives market, the authors first measure and evaluate the influence noise exerts on futures prices and then investigate its influence on option volatility.FindingsIn the period from 1996 to 2003, this study finds significant changes in the volatility and mean reversion in the noise level and a significant increase in its relation to implied volatility in option prices. The results are consistent with a bubble in technology stocks that occurred with significant increases in noise trading.Research limitations/implicationsThis study provides estimates for this model during the periods preceding and during the technology bubble. The study analysis shows that the volatility and mean reversion in the noise level are much stronger during the bubble period. Furthermore, the relation between noise trading and implied volatility in the futures market was of a significantly larger magnitude during this period. The study results support the importance of noise trading in market bubbles.Practical implicationsBloomfield, O'Hara and Saar (2009) find that noise traders lower bid–ask spreads and improve liquidity through increases in trading volume and market depth. Such improved market conditions could have positive effects on market quality, and this impact could be evidenced by lower implied volatility when noise traders are more active. Indeed, the results in this study indicate that the level and characteristics of noise trading are fundamentally different during the technology bubble, and this noise trading activity has a larger impact during this period on implied volatility in the options market.Originality/valueThis paper uniquely analyzes derivatives on the S&P 500 Index in order to detect the presence and influence of noise traders. The authors derive and implement a two-factor jump diffusion noise model. In their model, noise rectifies the difference of analysts' opinions, market information and beliefs among traders. By incorporating a reduced-form temporal expression of heterogeneities among traders, the model is rich enough to capture salient time-series characteristics of equity prices (i.e. stochastic volatility and jumps). A singular feature of the authors’ model is that stochastic volatility represents the random movements in asset prices that are attributed to nonmarket fundamentals.

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The Impact of Financial Information on Noise Traders: Based on the Perspective of Behavioral Finance

Financial Forum ◽

10.18282/ff.v9i1.811 ◽

2020 ◽

Vol 9 (1) ◽

pp. 28

Author(s):

Miao Jiang

Keyword(s):

Stock Market ◽

Behavioral Finance ◽

Investor Behavior ◽

Individual Investors ◽

Noise Traders ◽

Healthy Development ◽

Noise Trading ◽

Financial Media ◽

The Impact ◽

Excessive Noise

<p>In China's incomplete stock market which mainly consists of retail games and short-term operations, both of the high stock turnover rate and P/E ratios reflect excessive noise trading. This article focuses on the characteristic that individual investors are susceptible to financial media information, combined with the development and characteristics of financial media. From the perspective of behavioral finance, this paper analyzes the impact of financial media on noise trading. Using behavioral finance and psychology-related knowledge, investor behavior can be better understood, so as the motivation behind noise trading. Finally, in order to promote the healthy development of the stock market, this paper makes recommendations to improve the efficiency of the capital market.</p>

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Retail Trader’s Noise risk and closed-end fund pricing puzzle Investor Sentiment Model for Closed-end Equity Funds Pricing Puzzle an Empirical Study

Sukkur IBA Journal of Economics and Finance ◽

10.30537/sijef.v1i1.133 ◽

2017 ◽

Vol 1 (1) ◽

pp. 59

Author(s):

Raja Shahzad

Keyword(s):

Empirical Study ◽

Stock Returns ◽

Investor Sentiment ◽

The United States ◽

Equity Returns ◽

Equity Fund ◽

Noise Traders ◽

Demand And Supply ◽

Noise Trading ◽

Equity Funds

This empirical study investigates the rationale for the United States (US) closed-end equity fund discounts using investor sentiment approach of C. Lee, Shleifer, and Thaler (1991) for the period from 2004 to 2013. The result of this study suggests that discounts on closed-end equity funds decrease when small stocks return increase. The closed-end fund discounts have the significant stronger correlation with small capitalization as compared to large company’s stock returns. The results indicate that similar noise trading risk generated by retail traders explains the fluctuations in closed-end fund discounts and small capitalization equity returns even after controlling for fundamental factors. The results validated the existence of noise traders in market producing stochastic demand and supply based on their belief, subsequently affecting closed-end equity fund price in the market.

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Noise Trading and Single Stock Futures: Modifying Sentana & Wadhwani’s Model

Lahore Journal of Business ◽

10.35536/ljb.2020.v9.i1.a3 ◽

2020 ◽

Vol 9 (1) ◽

pp. 59-85

Author(s):

Imran Riaz Malik ◽

Attaullah Shah

Keyword(s):

Stock Markets ◽

Trading Volume ◽

Positive Impact ◽

Empirical Studies ◽

Noise Traders ◽

Modified Model ◽

Noise Trading ◽

Underlying Stocks ◽

Single Stock Futures

Derivatives,and their influence on the dynamics of underlying stock markets,is an interesting topic of debate, which predates their introduction. The unresolved influence of derivatives on their underlying stock markets still intrigues many. In this regard, researchers/stake holders are still curious about the (de)stabilizing influence of derivatives on the overall market. In disposition of these observations, two contradicting hypothesis have been studied widely and have remained the focus of attention in several theoretical and empirical studies. These hypotheses are explained in several ways. Among many, one explanation refers to the destabilizing influence of derivatives,due to the enhanced involvement of noise traders, after the introduction of derivatives.This aspect remains the topic of discussion for this study. After the formal introduction of the SSFs (Single Stock Futures) in Pakistan, this topic became a cause of concern for the stakeholders of this market as well. Hence, this study attempts to tap into this aspect of the de(stabilization) debate,by proposing a modified version of the famous Sentana & Wadhwani (1982)model. In order to tap the potential shortcomings of the S&W model, this study contributes to the extant literature in several ways: 1) It adds the feature of trading volume in the model to analyze and study the potential movement of noise traders from spot to futures market,due to the ease of trading that the futures markets offer, 2) the new, modified model adds a lagged term for returns in order to tap the potential asynchronous inefficiencies, 3) it considers the Generalized Error Distribution (GED) instead of the Gaussian Distribution, in order to realize the fact that returns are not normally distributed. Generally speaking, the modified version of the model not only extends the original model in terms of its explanation, but also empirically tests this aspect in the Single Stock Futures (SSFs) market of Pakistan. This model tested whether SSFs promote,or inhibit the noise trading post-SSFs. After putting it to test, the newer model did not report any negative or positive impact of the introduction of SSFs on the underlying stocks. This may conclude that the proclaimed (de)stabilizing role of the SSFs,in the context of Pakistan,is not justified.

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INSIDER TRADING AND VOLUNTARY DISCLOSURE

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024908004750 ◽

2008 ◽

Vol 11 (02) ◽

pp. 143-162 ◽

Cited By ~ 4

Author(s):

PHILIPPE GRÉGOIRE

Keyword(s):

Insider Trading ◽

Voluntary Disclosure ◽

Publicly Traded ◽

Noise Traders ◽

Publicly Traded Companies ◽

Noise Trading ◽

Disclosure Of Information ◽

Set Up

We set up a model to study the voluntary disclosure of information by insiders of publicly traded companies. We consider a trading framework as in [14] with many assets and one insider per asset. There is one discretionary liquidity trader who can allocate his trades across the different assets and many noise traders who trade with equal intensity in all assets. Before trade begins, insiders can disclose information in order to attract the discretionary liquidity trades. We show that if the level of noise trading is above a certain threshold, then there is an equilibrium where all insiders do not disclose any information. Below this threshold, equilibria are such that some information is always revealed by insiders. We also find that the greater the number of assets, the smaller the intensity of noise trading must be in order to induce insiders to disclose some information, and we find that insiders reveal all their information when the intensity of noise trading approaches zero.

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