Noisy market hypothesis

In finance, the noisy market hypothesis stands in opposition to the efficient-market hypothesis by arguing that security prices do not always reflect a firm’s true underlying value. It suggests that prices can be driven by speculators and momentum traders, as well as by insiders and institutions that trade for reasons unrelated to fundamentals, such as diversification, liquidity needs, or tax considerations. These short-term disturbances, described as "noise" can obscure the true value of securities and may result in mispricing of these securities, potentially for many years.Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2013, Chapter 8. The Noisy Market Hypothesis, Wall Street Journal, Jeremy Siegel, June 14, 2006

See also Adaptive market hypothesis Agent-based computational economics

Information cascade Noise trader

Grossman-Stiglitz paradox

References