Noise trader risk in financial markets¶
De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703-738.
Cited by¶
3 citations across 3 artifacts.
Each citation links to the sentence it supports in the citing article.
Primes¶
- Arbitrage (Finance)
- De Long, Shleifer, Summers, and Waldmann (1990) model this risk endogenously: noise traders generate stochastic mispricings whose unpredictable next-period dynamics deter rational arbitrageurs, so even when fundamentals are unchanged, "noise trader risk" can move correlations and prices against an arbitrageur whose horizon is finite.
This sourceOverlapping-generations model in which irrational noise traders with stochastic beliefs create a non-fundamental price risk that deters finite-horizon rational arbitrageurs, so prices can diverge from fundamentals even absent fundamental risk.
- De Long, Shleifer, Summers, and Waldmann (1990) model this risk endogenously: noise traders generate stochastic mispricings whose unpredictable next-period dynamics deter rational arbitrageurs, so even when fundamentals are unchanged, "noise trader risk" can move correlations and prices against an arbitrageur whose horizon is finite.
- Efficient Market Hypothesis (EMH)
- These tensions are reinforced by the noise-trader-risk model of De Long, Shleifer, Summers, and Waldmann (1990), which shows how even rational arbitrageurs face systematic risk from unpredictable sentiment shocks—rendering pure falsification of efficiency all the more problematic when the joint hypothesis must be tested against a model that itself evolves.
This sourceUnpredictable noise-trader sentiment is a non-fundamental risk that deters finite-horizon arbitrageurs — supports marker 221 (sentiment shocks make pure falsification of efficiency harder).
- These tensions are reinforced by the noise-trader-risk model of De Long, Shleifer, Summers, and Waldmann (1990), which shows how even rational arbitrageurs face systematic risk from unpredictable sentiment shocks—rendering pure falsification of efficiency all the more problematic when the joint hypothesis must be tested against a model that itself evolves.
- Speculative Bubble
- The two can look identical in real time—both are rising prices—but they have opposite implications for what happens next, and naming the bubble forces the diagnostic question that separates them, a clarification De Long, Shleifer, Summers, and Waldmann (1990) sharpen by modeling how positive-feedback "noise traders" can drive prices systematically away from fundamentals even in the presence of rational arbitrageurs.
This source(Closely related arguments developed in their Journal of Finance work.) Shows that unpredictable noise-trader sentiment introduces a non-fundamental risk factor that deters rational arbitrageurs with finite horizons, generating endogenous correlation regimes and limiting convergence trades.
- The two can look identical in real time—both are rising prices—but they have opposite implications for what happens next, and naming the bubble forces the diagnostic question that separates them, a clarification De Long, Shleifer, Summers, and Waldmann (1990) sharpen by modeling how positive-feedback "noise traders" can drive prices systematically away from fundamentals even in the presence of rational arbitrageurs.
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