Chasing Noise
Working Paper 16042
DOI 10.3386/w16042
Issue Date
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.
Published Versions
Mendel, Brock & Shleifer, Andrei, 2012. "Chasing noise," Journal of Financial Economics, Elsevier, vol. 104(2), pages 303-320. citation courtesy of