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Investment Noise and Trends

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

January 1, 2014

During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as well as shifts by active managers toward lower fees and more index-like investing. I develop an equilibrium model linking these investment trends to the decline in individual ownership, interpreting the latter as a reduction in noise trading. Active management corrects most noise-trader induced mispricing, and the fraction left uncorrected shrinks as noise traders' stake in the market declines. Less mispricing then dictates a smaller footprint for active management.

Number of Pages in PDF File: 47

Keywords: active management, noise traders

JEL Classification: G10

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Date posted: January 4, 2014 ; Last revised: April 18, 2014

Suggested Citation

Stambaugh, Robert F., Investment Noise and Trends (January 1, 2014). Available at SSRN: https://ssrn.com/abstract=2374103 or http://dx.doi.org/10.2139/ssrn.2374103

Contact Information

Robert F. Stambaugh (Contact Author)
University of Pennsylvania - The Wharton School ( email )
The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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