Deafened by Noise: Do Noise Traders Affect Volatility and Returns?

35 Pages Posted: 25 Aug 2008 Last revised: 20 Nov 2008

See all articles by Edward Podolski

Edward Podolski

Deakin University; Financial Research Network (FIRN)

Petko S. Kalev

RoZetta Institute; La Trobe Business School

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Date Written: November 18, 2008

Abstract

This paper investigates the relation between noise traders' activities and daily price volatility. Building on Black's (1986) seminal work, we investigate whether noise traders introduce additional risk into stock prices by increasing volatility. In addition, we test whether noise traders increase returns. Our results show that the noise traders' behavior has a significant positive effect on the daily stock price volatility but not on the returns. Furthermore, it is found that small cap stocks with the strongest limits to arbitrage are affected by noise traders the most. Our paper has also normative implications for policy makers.

Keywords: Information, Noise trading, Limits to arbitrage, Market efficiency, Volatility

JEL Classification: G12, G14

Suggested Citation

Podolski, Edward and Kalev, Petko S. and Duong, Huu Nhan, Deafened by Noise: Do Noise Traders Affect Volatility and Returns? (November 18, 2008). 21st Australasian Finance and Banking Conference 2008 Paper, Available at SSRN: https://ssrn.com/abstract=1253042 or http://dx.doi.org/10.2139/ssrn.1253042

Edward Podolski

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Petko S. Kalev (Contact Author)

RoZetta Institute ( email )

Sydney

La Trobe Business School ( email )

Department of Economics and Finance
Donald Whitehead Building: Level 3, DWB313
Bundoora, Victoria 3086
Australia
+613 9479 6285 (Phone)
+613 9479 1654 (Fax)

HOME PAGE: http://www.latrobe.edu.au/business/about/staff/profile?uname=PKalev

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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