Smart Money, Noise Trading and Stock Price Behavior / John Y. Campbell, Albert S. Kyle.

By:

Campbell, John Y

Contributor(s):

Material type: Text

TextSeries: Technical Working Paper Series (National Bureau of Economic Research) ; no. t0071.Publication details: Cambridge, Mass. National Bureau of Economic Research 1988.Description: 1 online resource: illustrations (black and white)Subject(s):

E - Macroeconomics and Monetary Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper derives and estimates an equilibrium model of stock price behavior in which exogenous "noise traders" interact with risk-averse "smart money" investors. The model assumes that changes in exponentially detrended dividends and prices are normally distributed, and that smart money investors have constant absolute risk aversion. In equilibrium, the stock price is the present value of expected dividends, discounted at the riskless interest rate, less a constant risk premium, plus a term which is due to noise trading. The model expresses both stock prices and dividends as sums of unobserved components in continuous time. The model is able to explain the volatility and predictability of U.S. stock returns in the period 1871-1986 in either of two ways. Either the discount rate is 4% or below, and the constant risk premium is large; or the discount rate is 5% or above, and noise trading, correlated with fundamentals, increases the volatility of stock prices. The data are not well able to distinguish between these explanations.

Tags from this library: No tags from this library for this title. Log in to add tags.

Average rating: 0.0 (0 votes)

Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber t0071 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

Collection: Colección NBER Close shelf browser (Hides shelf browser)

Previous	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	Next
Previous	nber t0068 Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator /	nber t0069 The Distribution of the Instrumental Variables Estimator and Its t-RatioWhen the Instrument is a Poor One /	nber t0070 The Time-Varying-Parameter Model as an Alternative to ARCH for Modeling Changing Conditional Variance: The Case of Lucas Hypothesis /	nber t0071 Smart Money, Noise Trading and Stock Price Behavior /	nber t0072 The R&D Master File Documentation /	nber t0073 Tests For Unit Roots: A Monte Carlo Investigation /	nber t0074 Endogenous Output in an Aggregate Model of the Labor Market /	Next

October 1988.

This paper derives and estimates an equilibrium model of stock price behavior in which exogenous "noise traders" interact with risk-averse "smart money" investors. The model assumes that changes in exponentially detrended dividends and prices are normally distributed, and that smart money investors have constant absolute risk aversion. In equilibrium, the stock price is the present value of expected dividends, discounted at the riskless interest rate, less a constant risk premium, plus a term which is due to noise trading. The model expresses both stock prices and dividends as sums of unobserved components in continuous time. The model is able to explain the volatility and predictability of U.S. stock returns in the period 1871-1986 in either of two ways. Either the discount rate is 4% or below, and the constant risk premium is large; or the discount rate is 5% or above, and noise trading, correlated with fundamentals, increases the volatility of stock prices. The data are not well able to distinguish between these explanations.