Investment Noise and Trends
47 Pages Posted: 4 Jan 2014 Last revised: 18 Apr 2014
Date Written: 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.
Keywords: active management, noise traders
JEL Classification: G10
Suggested Citation: Suggested Citation