A theory of noise trading in securities markets
Article Abstract:
In a recent article, Black (1) introduces a type of trading that he terms noise trading. He asserts that noise trading, which he defines as trading on noise as if it were information, must be a significant factor in securities markets. However, he does not provide an explanation of why any investors would rationally want to engage in noise trading. The goal of this paper is to provide such an explanation for one type of investor, managers of investment funds. As shown here, the incentive for a manager to engage in noise trading arises because of the positive signal that the level of the manager's trading provides about his or her ability to collect private information concerning current and potential investments. If the manager's compensation is directly related to investors' perceptions of his or her ability, the manager will then trade more frequently than is justified on the basis of his or her private information. In addition to providing this explanation for noise trading, the results of this analysis may also be useful for further empirical exploration of the relation between investment fund portfolio turnover and subsequent performance. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1988
User Contributions:
Comment about this article or add new information about this topic:
Endogenous borrowing constraints with incomplete markets
Article Abstract:
This article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models. We allow the constraints to depend on an investor's characteristics such as time preference, risk aversion, and income streams. The proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default. Using a numerical algorithm, we find that for an array of structural parameters, the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1997
User Contributions:
Comment about this article or add new information about this topic:
- Abstracts: A note on taxation and the leasing discount rates. Managing earnings with intercorporate investments. Corporate restructurings: a comparison of equity carve-outs and spin-offs
- Abstracts: Noise trading in small markets. Commercial bank portfolio behavior and endogenous uncertainty. The trading decision and market clearing under transaction price uncertainty
- Abstracts: Valuation of risky assets in arbitrage free economies with frictions. part 2 Reference variables, factor structure, and the approximate multibeta representation
- Abstracts: Nonsynchronous security trading and market index autocorrelation
- Abstracts: An analysis of yield curve notes. Intra-day arbitrage opportunities in foreign exchange and Eurocurrency markets