Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

117 Pages Posted: 26 Jul 2016 Last revised: 16 Aug 2019

See all articles by Joel Peress

Joel Peress

INSEAD - Finance

Daniel Schmidt

HEC Paris - Finance Department

Date Written: August 10, 2019

Abstract

We study the impact of noise traders’ limited attention on financial markets. We exploit episodes of sensational news (exogenous to the market) that distract noise traders. On “distraction days”, trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those that result from the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the influence of technological changes.

Suggested Citation

Peress, Joel and Schmidt, Daniel, Glued to the TV: Distracted Noise Traders and Stock Market Liquidity (August 10, 2019). INSEAD Working Paper No. 2016/54/FIN; INSEAD Working Paper No. 2016/54/FIN. Available at SSRN: https://ssrn.com/abstract=2814114 or http://dx.doi.org/10.2139/ssrn.2814114

Joel Peress (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 60 72 40 00 (Phone)
+33 1 60 72 40 45 (Fax)

Daniel Schmidt

HEC Paris - Finance Department ( email )

France
0652678597 (Phone)

HOME PAGE: http://daniel-schmidt.eu

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