Smart Money, Noise Trading and Stock Price Behaviour
John Y. Campbell,Albert S. Kyle +1 more
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In this paper, the authors estimate an equilibrium model of stock price behavior in which changes in exponentially de-trended dividends and prices are normally distributed and exogenous "noise traders" interact with "smart-money" investors who have constant absolute risk aversion.Abstract:
This paper estimates an equilibrium model of stock price behaviour in which changes in exponentially de-trended dividends and prices are normally distributed and exogenous "noise traders" interact with "smart-money" investors who have constant absolute risk aversion. The model can explain the volatility and predictability of U.S. stock returns in the period 1871-1986 using either a low discount rate (4% or below) and a large constant risk discount on the stock price, or a higher discount rate (5% or above) and noise trading correlated with fundamentals. The data are not well able to distinguish between these explanations.read more
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TL;DR: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples.
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Testing for a Unit Root in Time Series Regression
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Likelihood ratio statistics for autoregressive time series with a unit root
David A. Dickey,Wayne A. Fuller +1 more
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Conditional heteroskedasticity in asset returns: a new approach
TL;DR: In this article, an exponential ARCH model is proposed to study volatility changes and the risk premium on the CRSP Value-Weighted Market Index from 1962 to 1987, which is an improvement over the widely-used GARCH model.
Journal ArticleDOI
Noise Trader Risk in Financial Markets
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