Review of Economic Studies Vol. 60 No. 1 1993
Smart Money, Noise Trading and Stock Price Behaviour
open access
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.
- DOI
- 10.2307/2297810
- Volume
- 60
- Issue
- 1
- Pages
- 1
- Sources
- crossref openalex bibtex:phds-export.bib