Noise Momentum around the World

Charlie Cai, Robert Faff, Yongcheol Shin

Research output: Contribution to journalArticlepeer-review

Abstract

We argue that arbitrageurs will strategically limit their initial investment in an arbitrage opportunity in anticipation of further mispricing caused by the deepening of noise traders' misperceptions. Such ‘noise momentum’ is an important determinant of the overall arbitrage process. We design an empirical strategy to capture noise momentum in a two-period generalized error correction model. Applying it to a wide range of international spot-futures market pairs, we document pervasive evidence of noise momentum around the world.

Original languageEnglish
Pages (from-to)79-104
Number of pages25
JournalAbacus
Volume54
Issue number1
Early online date20 Mar 2017
DOIs
Publication statusPublished - Mar 2018

Keywords

  • Futures and spot prices
  • Initial mispricing correction
  • Limited arbitrage
  • Noise momentum

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