SSE/EFI Working Paper Series in Economics and Finance
No 644:
ENDOGENOUS NOISE TRADERS
Marcus Salomonsson ()
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.
Keywords: Market microstructure; no-trade theorems; adverse selection; (follow links to similar papers)
JEL-Codes: G14; (follow links to similar papers)
14 pages, December 5, 2006
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