Noise Trading Model Based On Securities Margin Trading Cost

According to the efficient market hypothesis,the asset price will gradually converge to its intrinsic value over time due to the arbitrage behavior in the market,and the spread between asset price and intrinsic value over is noise.The hypothesis claims that irrational investors are in a disadvantaged position in competitions and will eventually leave the market or convert to rational investors,and rational investors will survive and finally dominate the market.Yet since 1980 s,many empirical researches of financial market came cross a plethora of phenomena which efficient market hypothesis failed to explain,and thus scholars tried to combine psychological findings and financial market,applying them to aid their analyses of investor behaviors.In the financial market,noise traders refer to traders who rely predominantly on insufficient information or inferior information to make investment decisions.They often overreact or underreact to the information,and push the asset price to deviate from its intrinsic value.Since noise traders are often incapable to recognize the ineffectiveness and inefficiency of the information,under their irrational activities,asset price is not likely to go through a reverse in the short run.Chinese securities market is gradually opening and developing with a fast pace since 1990,and it has made world-famous achievements.Researching into noise trader behavior and their influence on other investors or the market is thus significant to the building and improvement of a healthy financial market.We consider the noise trading in the securities market on the basis of DSSW model(DeLong-Shleifer-Summers-Waldman model)and features of Chinese securities market,and introduce securities margin trading cost parameters to build an investor behavior competition model.The results show that: risk asset price in current period is higher when noise traders sell short the securities and the cost of borrowing securities exists,and as cost of borrowing securities increases,risk asset price in current period becomes higher.So we conclude that one explanation of the bubble of Chinese securities market is the high cost of borrowing securities.On the other hand,risk asset price in current period is lower when noise traders buy the securities and the cost of financing exists,and as cost of financing increases,the risk asset price in current period becomes lower.So we conclude that reducing financing rate has positive effect on attracting funds and stimulating the stock market.Furthermore,we analyze the impact of noise trader proportion,exogenous biased endowment of the noise trader and securities margin trading cost on the expected return spread of noise traders and sophisticated traders in the competition model.Comparing with the original model,even if noise traders have pessimistic predicted deviation on the next period risk asset expected price,they may still get higher expected return than sophisticated traders under specific parameters.