Noise Trader Risk Exists . . . But the Noise Traders are Not Who You Think They are
Posted: 30 May 2003
Date Written: November 11, 2002
Using a unique dataset of individual investor trades, this paper examines whether there is evidence of noise trader risk in a broad equity market context. The paper finds evidence of excess volatility and excess correlations between stocks. Additionally factor-pricing tests reveal strong evidence of a significant priced noise trader factor in returns. The paper concludes that there is evidence of noise trader risk, however this risk is not associated with individual investors, but instead with institutional investors. Institutional frictions such as common investment strategies, performance related mutual fund flows and career concerns are a much more plausible source of noise trader risk than is individual investor sentiment.
Keywords: Noise trader risk, individual investors, institutional frictions, sentiment, excess volatility, co-movement
JEL Classification: G1
Suggested Citation: Suggested Citation