Noise trading

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Noise Trading ( German  "trade based on the market noise" ) stands as Anglizismus in trading for a trading strategy in which only noise - not on price-sensitive fundamentals - based moods with the purchase , holding or selling decisions of traders play a role.

General

“Noise” is to be translated as “noise” in the stock market . This goes back to a 1986 in US literature used analogy back, consisting of Telecommunications , the "white noise" ( English white noise borrowed) a random disturbance. According to this understanding, “noise” is the basic noise of the capital market , the unsystematic action of market participants without any fundamental trigger.

There are therefore two types of market participants , namely those who primarily act on the stock market based on fundamental company data and those who pay attention to the “noise of the market”. The latter are the "noise traders", they do not act on the basis of the rational principle , but on the basis of non-fundamental rumors .

Market participants

“Noise traders” engage in noise trading , which causes random fluctuations in stock exchange prices. These "noise traders" are mostly market participants guided by herd behavior who are motivated by moods or groups to buy into rising prices ( bull market ) or sell into falling prices ( bear market ). This is the so-called “mood noise”. They also overreact to new information or uncritically extrapolate past market developments into the future.

species

How noise traders react to pseudo-information depends on whether they are following a positive or negative feedback strategy. A distinction must therefore be made between the positive (noise) feedback trader and the negative (noise) feedback trader, each with different trading strategies.

  • The positive (noise) feedback trader has observed an increase in share prices in the past and reacts to this with a purchase decision. Accordingly, he reacts with a sales decision when observing past price drops. These decisions violate the weakest form of the market efficiency hypothesis , which states that past data is already included in the market price.
  • The negative (noise) feedback trader sells when the price has risen and buys when the price has fallen. Depending on the exact time of the purchase or sale, this can be seen as a countercyclical investment .

Both types completely ignore the price-relevant company data and only pay attention to the “market noise” caused by other traders in the context of selective perception . If traders act due to the need for liquidity ( lack of money ), they are called liquidity traders .

economic aspects

The “noise” makes financial markets possible, but also makes them imperfect . Noise trading are investment decisions that are based on the fact that the decision-maker does not act on the basis of the rational principle , his actions do not correspond to those of Homo oeconomicus . As a result, stock exchange prices are not always based on the intrinsic value , but can deviate from this to a greater or lesser extent due to noise trading . The actions of the noise traders and their imitators have a positive influence on the prices and no longer correspond to the fundamental value. This mispricing may cause unexpected price falls if certain investors for the purpose of profit-taking selling and follow other this herd behavior. Conversely , if noise traders drive up share prices and investors follow the stock market trend , a speculative bubble can arise that no longer corresponds to the fundamental value. Positive feedback trading can overshoot prices; it increases the volatility (fluctuations) in stock prices. The mean reversion effect occurs when the prices align again to the "rational" value.

Noise trading and noise trader are objects of knowledge of behavioral economics ( English behavioral finance ).

Individual evidence

  1. ^ Fischer Black, Noise , in: The Journal of Finance no.3, 1986, p. 529
  2. ↑ Christian Röckemann, Exchange services and investor behavior: An empirical contribution to noise trading , 1995, p. 50
  3. ^ Fischer Black, Noise , in: The Journal of Finance no.3, 1986, p. 529
  4. ^ Christian Röckemann, Exchange services and investor behavior: An empirical contribution to noise trading , 1995, p. 50 f.
  5. ↑ Sylvia Mieszkowski / Sigrid Nieberle (eds.), Unlaute: Noise / Gerausch in Kultur, Medien und Wissenschaft since 1900 , 2017, p. 346
  6. ↑ Wolfgang Gerke (Ed.), Gerke Börsen Lexikon , 2002, p. 574 f.
  7. ^ Daniel C. Freiherr von Heyl, Noise als Finanzwirtschaftliches Phenomenon , 1995, p. 52
  8. ↑ Bertram Scheufele / Alexander Haas, Medien und Aktien , 2008, p. 50
  9. ↑ Jessica Plöger, Neoclassical Capital Market Theory and Behavioral Finance , 2014, p. 64
  10. ↑ Waldemar Wagner, Nonlinear Time Series Analysis as a New Method for Event Studies , 2019, p. 258 f.
  11. ↑ Wolfgang Gerke (Ed.), Gerke Börsen Lexikon , 2002, p. 575
  12. ^ Fischer Black, Noise , in: The Journal of Finance no.3, 1986, p. 530
  13. ^ Christian Röckemann, Exchange services and investor behavior: An empirical contribution to noise trading , 1995, p. 50 f.
  14. ↑ Annemarie Sapusek, Information Efficiency on Capital Markets , 1998, p. 80