Journal
INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS
Volume 41, Issue -, Pages 89-100Publisher
ELSEVIER SCIENCE INC
DOI: 10.1016/j.irfa.2015.05.021
Keywords
Behavioral finance; EMH; Noise trader risk; Market anomalies
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While mainstream neoclassical finance ignores the role played by noise traders, a significant amount of empirical evidence is available to show that noise traders are active market participants and that their participation gives rise to market anomalies. Unlike neoclassical finance, behavioral finance allows for market inefficiency on the grounds that market participants are subject to common human errors that arise from heuristics and biases. In this paper we review the literature on the behavior of noise traders and analyze the consequences of their presence in the market, starting with a distinction between neoclassical finance and behavioral finance. We identify the market anomalies that provide evidence for the tendency of markets to trade at irrational levels, demonstrate how noise trading is related to some market fundamentals, and describe the models used to quantify noise trader risk. (C) 2015 Elsevier Inc. All rights reserved.
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