Chasing Noise

40 Pages Posted: 4 Jun 2010 Last revised: 5 Jun 2010

See all articles by Brock Mendel

Brock Mendel

Harvard University

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: May 2010

Abstract

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.

Suggested Citation

Mendel, Brock and Shleifer, Andrei, Chasing Noise (May 2010). NBER Working Paper No. w16042. Available at SSRN: https://ssrn.com/abstract=1617044

Brock Mendel (Contact Author)

Harvard University ( email )

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Andrei Shleifer

Harvard University - Department of Economics ( email )

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HOME PAGE: http://www.economics.harvard.edu/~ashleife/

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