TITLE:
Opening Noise in the Indian Stock Market: Analysis at Individual Stock Level
AUTHORS:
Faisal Nazir Zargar, Dilip Kumar
KEYWORDS:
Noise Trading, Financial Markets, Arbitrageurs, Asset Pricing, Market Efficiency
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.1,
January
10,
2019
ABSTRACT: This is an econometric study of noise in the
financial markets, based on the Indian stock market. Historically, the role
& impact of noise traders in the financial markets has been assumed to be
minimal or negligible since noise traders should lose money when trading
against rational arbitrageurs. However, Shiller et al. [1] argue that there is little reason to believe that noise traders
are unimportant and some reason to suspect that rational arbitrageurs dominate
the financial markets. Moreover, De Long et
al. [2] have developed formal models that allow for the survival of noise
traders. Like any other systematic risk, the risk brought in by the noise
traders, due to their random sentiments, should be priced. In this paper, we
propose an “opening noise trading model” in which the opening price of the
stock contains a component of noise that is assumed to be orthogonal to the
true price change caused by the arrival of new information. We also provide
evidence of the opening stock price containing noise on an everyday basis among
all the Nifty stocks. Furthermore, we have shown how to estimate the share of
noise in the opening price.