Noise Trading and Asset Pricing Factors

61 Pages Posted: 29 Apr 2019 Last revised: 20 Nov 2019

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Yang Song

University of Washington - Michael G. Foster School of Business

Hong Xiang

The University of Hong Kong

Date Written: November 18, 2019

Abstract

We demonstrate that a large set of asset pricing factors (anomalies) are significantly exposed to “noise trader” risk, which arises from uninformative demand shifts of mutual fund investors. Mutual fund investors are largely ignorant of systematic factors and respond to simple signals when allocating capital to mutual funds. We measure the uninformed demand of factors by aggregating flow-induced trades of individual stocks underlying the factors. We find that mutual funds’ flow-induced trading significantly determines average returns, volatilities, and comovements among the well-studied factors, indicating that these factors are exposed to “noise trader” risk. Importantly, we show that this flow-driven “noise trader” risk is significantly priced by arbitrageurs and other investors.

Keywords: noise trader risk, factor premia, anomaly

JEL Classification: G10

Suggested Citation

Huang, Shiyang and Song, Yang and Xiang, Hong, Noise Trading and Asset Pricing Factors (November 18, 2019). Available at SSRN: https://ssrn.com/abstract=3359356 or http://dx.doi.org/10.2139/ssrn.3359356

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yang Song (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Hong Xiang

The University of Hong Kong ( email )

Hong Kong

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