Listening to the Noise: On Price Efficiency with Dynamic Trading

Abstract

This paper shows that, in the canonical dynamic rational expectations equilibriummodel, public information about future noise trading is potentially detrimental tocontemporaneous price efficiency. Our result supports concerns that social sentimentinvesting, sparked by growing availability of big data and advances in the way ofprocessing it, exacerbates, rather than ameliorates, the negative impact of noisetrading on price efficiency.

Keywords: social sentiment investing, price efficiency, noise trading, information aggregation

JEL Classification: G12, G14