Is Noise Trading Cancelled Out by Aggregation?

Yan, Hongjun

doi:10.1287/mnsc.1100.1167

Cited by 55 publications

(30 citation statements)

References 40 publications

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“…Otherwise, there can be a large pricing effect. This is also the case when investors' demands are nonlinear functions of their beliefs, as shown in Yan (). Duchin and Levy () also show that agents' demand functions are nonlinear in beliefs of variances of asset returns and the disagreement about the variance can provide a potential explanation for the excess volatility puzzle.…”

Section: Introductionmentioning

confidence: 92%

Disagreement in a Multi‐Asset Market

Shi

2012

Int Rev Finance

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This paper provides a simple framework to study the effect of disagreement in a multi-asset market equilibrium by considering two agents who disagree about expected returns, variances, and correlation of returns of two risky assets. When agents' subjective beliefs are characterized by mean preserving spreads of a benchmark homogeneous belief, we show that the effect of the disagreement does not cancel out in general and the effect in a multi-asset market can be very different from a single asset market. In particular, the market risk premium can increase and the risk-free rate can decrease significantly even when the market is overoptimistic and overconfident.3 When the distributions of returns are normal, being pessimistic means perceiving a lower expected return than the one under the objective belief, and being doubtful means perceiving a larger standard deviation of returns than the one under the objective belief. 4 Meaning that more risk-tolerant agents perceive low expected returns (are more doubtful). , 2 = [ ] and ri,jk = Correli [rj, rk]. We use Bi: = (mi, Si) to denote the subjective belief of agent i. Disagreement in a Multi-Asset Market 8 The pessimism P measures the average pessimism across assets weighted by their weights in the market portfolio. However, since the amount of optimism/pessimism is the same for each asset, q1 = q2 = q, the average pessimism is simply given by -q. Disagreement in a Multi-Asset Market

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Section: Introductionmentioning

confidence: 92%

Disagreement in a Multi‐Asset Market

Shi

2012

Int Rev Finance

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“…Shleifer, 2000; Fehr andTyran, 2005), who typically maintain that individual idiosyncrasies in market behavior are cancelled out by aggregation (cf. Yan, 2010).…”

Section: Data and Measurement Of Risk Takingmentioning

confidence: 99%

The social meaning of financial wealth: Relational accounting in the context of 401(k) retirement accounts

Hayes

2019

Finance soc.

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Behavioral economics has become a dominant set of theories in explaining economic behavior, yet such behavior remains under the limited purview of psychological, cognitive, or neural approaches. This article draws on and extends Viviana Zelizer’s social meaning of money framework in conjunction with new work in ‘relational accounting’ to suggest a sociological counterpoint, focusing in particular on the social and symbolic meaning attached to individual 401(k) retirement accounts. Following a market downturn, neoclassical and behavioral economics predict various types of behavioral responses, in particular loss aversion – where investors seek to increase risk-taking rather than locking in a sure loss (a loss is more painful to bear than an equivalent gain). A sociological theory that understands the shared meaning of retirement saving would predict something different, a behavior I call durable conservatism. In this article, I show how this concept better explains observed risk behavior in Americans’ 401(k) accounts following the 2002 and 2008 bear markets in stocks, and how that response differed from the behavior documented in non-retirement brokerage accounts.

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“…Across a range of other financial markets there have been investigations of the link between speculation or noise trading and price misalignments or volatility. Verma and Verma (2007) examine noise trading in equity markets; Yan (2009) argues that speculation is not random and influential in aggregation but that behavioural biases will cause systematic deviations from intrinsic value. Foreign exchange has been a particular focus as a consequence of its liquidity, volatility and the way that speculative attacks appear to have infringed on government sovereignty.…”

Section: Introductionmentioning

confidence: 99%

Foreign Exchange Speculation: An Event Study

Hayward

2018

IJFS

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Does speculation facilitate price discovery or instability? If it is price discovery, it is beneficial and should be encouraged; if it is instability, welfare is enhanced by its reduction. This paper seeks to distinguish between these two characteristics by analysing those times when speculation in the foreign exchange market is most extreme. A series of event studies are conducted on the extremes of speculative sentiment and speculative activity. If speculation is noise, extreme sentiment and extreme positions should lead to overshooting and increase risk of subsequent reversals. The finding that speculative extremes do not provide information about subsequent returns implies that speculation is part of the process of price discovery and that efforts to reduce it would reduce the informational efficiency of financial markets.

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Is Noise Trading Cancelled Out by Aggregation?

Cited by 55 publications

References 40 publications

Disagreement in a Multi‐Asset Market

Disagreement in a Multi‐Asset Market

The social meaning of financial wealth: Relational accounting in the context of 401(k) retirement accounts

Foreign Exchange Speculation: An Event Study

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