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Is noise trading cancelled out by aggregation? / Hongjun Yan in Management science, Vol. 56 N° 7 (Juillet 2010) 

Public ISBD [article]  in Management science > Vol. 56 N° 7 (Juillet 2010) . - pp. 1047-1059 Titre : Is noise trading cancelled out by aggregation? Type de document : texte imprimé Auteurs : Hongjun Yan, Auteur Année de publication : 2010 Article en page(s) : pp. 1047-1059 Note générale : Management Langues : Anglais (eng) Mots-clés : Aggregation  Bias  Noise  trading  Behavioral  finance Index. décimale : 658 Organisation des entreprises. Techniques du commerce Résumé : Conventional wisdom suggests that investors' independent biases should cancel each other out and have little impact on equilibrium at the aggregate level. In contrast to this intuition, this paper analyzes models with biased investors and finds that biases often have a significant impact on the equilibrium even if they are independent across investors. First, independent biases affect the equilibrium asset price if investor demand for the asset is a nonlinear function of the bias. Second, even if the demand function is linear in the bias, it may still have a significant impact on the equilibrium because of the fluctuation of the wealth distribution. An initial run-up of the stock price makes optimistic investors richer, which then further pushes the stock price up and leads to lower future returns. This effect can lead to price overshooting, i.e., a negative expected future return. Similarly, an initial drop of the stock price leads to higher future returns. Simple calibrations show that a modest amount of biases can have a large impact on the equilibrium. DEWEY : 658 ISSN : 0025-1909 En ligne : http://mansci.journal.informs.org/content/56/7.toc [article] Is noise trading cancelled out by aggregation? [texte imprimé] / Hongjun Yan, Auteur . - 2010 . - pp. 1047-1059. Management Langues : Anglais (eng) in Management science > Vol. 56 N° 7 (Juillet 2010) . - pp. 1047-1059 Mots-clés : Aggregation  Bias  Noise  trading  Behavioral  finance Index. décimale : 658 Organisation des entreprises. Techniques du commerce Résumé : Conventional wisdom suggests that investors' independent biases should cancel each other out and have little impact on equilibrium at the aggregate level. In contrast to this intuition, this paper analyzes models with biased investors and finds that biases often have a significant impact on the equilibrium even if they are independent across investors. First, independent biases affect the equilibrium asset price if investor demand for the asset is a nonlinear function of the bias. Second, even if the demand function is linear in the bias, it may still have a significant impact on the equilibrium because of the fluctuation of the wealth distribution. An initial run-up of the stock price makes optimistic investors richer, which then further pushes the stock price up and leads to lower future returns. This effect can lead to price overshooting, i.e., a negative expected future return. Similarly, an initial drop of the stock price leads to higher future returns. Simple calibrations show that a modest amount of biases can have a large impact on the equilibrium. DEWEY : 658 ISSN : 0025-1909 En ligne : http://mansci.journal.informs.org/content/56/7.toc