Noise Trading in Small Markets

  • Published: Apr 30, 2012
  • Pages: 1537-1550
  • DOI: 10.1111/j.1540-6261.1996.tb04079.x


Considering noise traders as agents with unpredictable beliefs, we show that in an imperfectly competitive market with risk averse investors, noise traders may earn higher expected utility than rational investors. This happens when, by deviating from the Nash equilibrium strategy, noise traders hurt rational investors more than themselves. It follows that the willingness of arbitrageurs to exploit noise traders' misperceptions is lower relative to a perfectly competitive economy. This result reinforces the theory that noise trading may explain closed‐end fund discounts and small firms' returns, since these markets are less competitive than the market for large firms' stock.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Members' Login


Members' Options

Site Footer

View Mobile Version