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Noise Momentum Around the World
Author(s) -
Cai Charlie X.,
Faff Robert,
Shin Yongcheol
Publication year - 2018
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12101
Subject(s) - arbitrage , momentum (technical analysis) , anticipation (artificial intelligence) , futures contract , limits to arbitrage , noise (video) , economics , investment (military) , limit (mathematics) , financial economics , econometrics , business , computer science , mathematics , political science , mathematical analysis , artificial intelligence , politics , law , image (mathematics)
We argue that arbitrageurs will strategically limit their initial investment in an arbitrage opportunity in anticipation of further mispricing caused by the deepening of noise traders' misperceptions. Such ‘noise momentum’ is an important determinant of the overall arbitrage process. We design an empirical strategy to capture noise momentum in a two‐period generalized error correction model. Applying it to a wide range of international spot‐futures market pairs, we document pervasive evidence of noise momentum around the world.