Download This PaperAntinoise In U.S. Equity Markets
40 Pages Posted: 7 Apr 2020 Last revised: 8 Dec 2020
Date Written: April 7, 2020
Abstract
There are many well documented behavioral biases in financial markets. Yet, analyzing U.S. equities reveals that less than 1.21% of returns are predictable in recent years. Given the high number of biases, why are returns not more predictable? We provide two pieces of new evidence for one possible explanation. In the long-run, low correlations across signals that trigger biases may create sufficient antinoise which mutes more sizable patterns in returns. In the short-run, however, correlation spikes coincide with market volatility indicating that behavioral biases may become more visible during crises.
Keywords: Noise Traders, Behavioral Economics, Machine Learning, Asset Pricing
JEL Classification: G41, G11, G14
Suggested Citation: Suggested Citation