Study Of Noise Trading In The Securities Market

Based on the call for theoretical researches from the rapid development of China's securities market and the trend of finance literature, the thesis is a formal investigation on the noise trading in securities markets. We review the related finance literature, analyze the sources of noise securities trading and the mechanism and effects of noise on asset prices. Finally, I describe the noise trading in China's securities market empirically, and discuss the policy implications of noise trading theory.Although I do not divide the paper into different parts, we can also understand the thread of it and read them separately. Part I includes the Introduction, Chapters I and II, which is just a foundation of the whole dissertation. We introduce the theoretical and practical background, review the related literature systematically, and find the empirical evidence of the existence of noise trading. This part aims to provide a firm basis for the paper by defining some important concepts.Part II consists of Chapters HI, IV and V. In the part I analyze the different sources of noise trading. According to the generating mechanisms of different kinds of noise, it can be categorized as information-based noise, agent-based noise, and manipulation-based noise.Chapter VI is the third part. In this chapter we construct a model on the effects of noise trading on asset prices, which is based on DSSW (1990a). In the model, we assume different behavioral characteristics of noise traders from those of DSSW model in that overreactions dominate in our model. If there are shocks on the fundamental value of the assets, we can conclude that they will lead to bubbles in the securities market.Part IV is Chapter VII, which is an informal discussion about China's current situations of noise securities trading. We analyze and explain why China's market can see a high ratio of noise trading. Furthermore, we do a empirical investigation about the survival of noise traders in China's market.The last chapter draws some conclusions from the studies of the thesis and gives some policy implications of the research. In this chapter, I just lay out some fundamental thoughts about the policy instead of a systematic policy-oriented theory. It is so because a systematic policy-oriented theory must be based on thefirm theoretic and empirical studies, but we could not achieve such a goal in the thesis. This will be still under considerations in my future career.As mentioned earlier, we draw some conclusions from the paper. The first one is about the existence of noise trading. We analyze the behavioral characteristics of institutional and individual investors and find that both types of investors have the motivation to be involved in noise trading, especially in herding behavior. From the theoretic perspective, noise trading roots in the research progress of behavioral psychology in recent decades. We see such progress in two rows: The first is some judgments based on large amounts of psychological experiments by psychologists. They find that humans do not behave as what they predict according to the rational assumption, but make judgments by means of heuristics, which are based on the bounded rationality assumption and will lead to heuristic biases. On the other hand, psychologists such as Kahneman and Tversky develop some theoretic models as Prospect Theory, trying to reinterpret the mental and behavioral mechanisms of investors.Secondly, we have some conclusions on the sources of noise trading. According to the sources and mechanisms, we can divide the noise into three categories: The first is the noise about information, the second is about principal-agent relationships, and the third is about stock price manipulations. We explain the first type of noise trading by DSSW model, which shows that some investors accepts a biased information set or interpret the information mistakenly, and submit demands for the asset according to such a biased information set, which affects the asset prices. As for the agent-based noise, we introduce the Trueman mo...