Learning about Noise

44 Pages Posted: 27 Mar 2015 Last revised: 22 Mar 2018

See all articles by Paul Marmora

Paul Marmora

Randolph-Macon College

Oleg Rytchkov

Temple University - Department of Finance

Date Written: December 26, 2017


This paper studies how acquisition of non-fundamental information (learning about noise) affects financial markets. We develop a rational expectations model with investors who are endowed with fundamental and non-fundamental information of heterogeneous quality and who optimally allocate learning capacity between fundamentals and noise. We demonstrate that learning about noise increases price informativeness, and the price can be the most informative when the majority of investors acquire non-fundamental information. We also find that i) investors whose prior fundamental information is relatively precise (imprecise) compared to their prior non-fundamental information learn only about fundamentals (noise) and ii) learning about fundamentals (noise) increases (decreases) the heterogeneity in the fundamental information quality across investors.

Keywords: rational expectations, information acquisition, entropy, price informativeness

JEL Classification: G14, D82, D83

Suggested Citation

Marmora, Paul and Rytchkov, Oleg, Learning about Noise (December 26, 2017). Journal of Banking and Finance, Vol. 89, 2018, Fox School of Business Research Paper No. 15-067, Available at SSRN: https://ssrn.com/abstract=2583978 or http://dx.doi.org/10.2139/ssrn.2583978

Paul Marmora

Randolph-Macon College ( email )

114 College Avenue
Ashland, VA 23005
United States

Oleg Rytchkov (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

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