Noise Momentum Around the World

38 Pages Posted: 13 Jul 2014

See all articles by Charlie X. Cai

Charlie X. Cai

University of Liverpool Management School

Robert W. Faff

University of Queensland

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies

Date Written: July 11, 2014

Abstract

We argue that arbitrageurs will strategically limit their initial investment in an arbitrage opportunity in anticipation of further mispricing caused by the deepening of noise traders’ misperceptions. Such ‘noise momentum’ is an important determinant of the overall arbitrage process. We design an empirical strategy to capture noise momentum in a two-period generalized error correction model (GECM). Applying it to a wide range of international spot-futures market pairs, we document pervasive evidence of noise momentum around the world.

Keywords: limited arbitrage, noise momentum, initial mispricing correction, futures and spot prices

JEL Classification: C12, C22, G13, G14

Suggested Citation

Cai, Charlie Xiaowu and Faff, Robert W. and Shin, Yongcheol, Noise Momentum Around the World (July 11, 2014). Available at SSRN: https://ssrn.com/abstract=2465295 or http://dx.doi.org/10.2139/ssrn.2465295

Charlie Xiaowu Cai

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

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