Opening Jump and Noise Trading
28 Pages Posted: 27 Aug 2009 Last revised: 11 Jul 2011
Date Written: July 4, 2011
In this paper, we provide evidence that the opening stock price contains noise on an everyday basis among all the NIFTY companies. However, we also find that the impact of noise does get eliminated from prices at the end of the trading day. We show how these seemingly contradictory twin empirical findings about the Indian stock market can be reconciled by proposing a Noise Trading Model in the framework of Kyle (1985). Furthermore, we show how to come up with a simple trading strategy that makes use of the market inefficiency created due to noise and demonstrate that it is indeed highly profitable.
Keywords: Noise trading, Price discovery, Information Content, Opening Jump
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation