Noise Trading and Asset Pricing Factors

64 Pages Posted: 29 Apr 2019 Last revised: 18 May 2021

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 broad set of asset pricing factors (anomalies) are significantly exposed to "noise trader risk," and the noise trader risk is priced in factor premia. We first confirm that mutual funds' flow-induced trades of factors are uninformed as they generate a large price impact on factor returns, followed by a complete reversal. We then show asset pricing factors are subject to flow-driven noise trader risk in that expected variation (covariation) of flow-induced noise trading strongly forecast variance (covariance) of factor returns. Importantly, factor premia are higher when flow-driven noise trader risk is expected to be more salient.

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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