Review of Finance Vol. 17 No. 2 2013
Noise Trading and Illusory Correlations in US Equity Markets
open access
Abstract
This paper provides evidence that “illusory correlations”—a well-documented source of cognitive bias—lead some agents to be imperfectly rational noise traders. We focus on the head-and-shoulders chart pattern, considered by technical analysts to provide one of the most reliable trading signals. Our findings indicate that the pattern is associated with a substantial rise in trading volume even though it does not profitably predict directional movements. We further substantiate the connection between head-and-shoulders trading and imperfectly rational noise trading by showing that the pattern is associated with lower bid-ask spreads.
- DOI
- 10.1093/rof/rfr037
- Volume
- 17
- Issue
- 2
- Pages
- 625-652
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref