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Presidential Address: Investment Noise and Trends
Author(s) -
STAMBAUGH ROBERT F.
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12174
Subject(s) - equity (law) , investment (military) , presidential address , economics , volatility (finance) , monetary economics , noise (video) , investment strategy , business , footprint , financial economics , geography , political science , public administration , artificial intelligence , politics , computer science , market liquidity , law , image (mathematics) , archaeology
During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as well as shifts by active managers toward lower fees and more index‐like investing. I develop an equilibrium model linking these investment trends to the decline in individual ownership, interpreting the latter as a reduction in noise trading. Active management corrects most noise trader–induced mispricing, and the fraction left uncorrected shrinks as noise traders' stake in the market declines. Less mispricing then dictates a smaller footprint for active management.