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Endogenous Noise Traders

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Abstract
We construct a parsimonious model of a financial market where the marginal investor is an endogenous noise trader. Such a trader anticipates that future shocks may force him to exit his position. In compensation he requires a higher return. We show that the original seller of the asset pays the required return. This can only be optimal if the seller has access to an investment opportunity that gives a sufficiently high return, compared to the noise trader's investment opportunities. We also show that, if the noise trader expects to get informative signals, the required return does not necessarily decrease, as claimed in the earlier literature.

Suggested Citation

  • Salomonsson, Marcus, 2006. "Endogenous Noise Traders," SSE/EFI Working Paper Series in Economics and Finance 644, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0644
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    References listed on IDEAS

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    Cited by:

    1. Hsu, Chih-Hsiang, 2016. "Strategic noise trading of later-informed traders in a multi-market framework," Economic Modelling, Elsevier, vol. 54(C), pages 235-243.

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    More about this item

    Keywords

    Market microstructure; no-trade theorems; adverse selection;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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