Open AccessChasing Noise
Author(s) -
Brock Mendel,
Andrei Shleifer
Publication year - 2010
Publication title -
ern: other microeconomics: search; learning; information costs & specific knowledge; expectation & speculation (topic)
Language(s) - English
Resource type - Reports
DOI - 10.3386/w16042
Subject(s) - noise (video) , computer science , artificial intelligence , image (mathematics)
We present a simple model in which rational but uninformed traders occasionally chase noise as if it were information, thereby amplifying sentiment shocks and moving prices away from fundamental values. We fill a theoretical gap in the literature by showing conditions under which noise traders can have an impact on market equilibrium disproportionate to their size in the market. The model offers a partial explanation for the surprisingly low market price of financial risk in the Spring of 2007.
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