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Noise Momentum around the World

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Publication details

JournalAbacus
DateAccepted/In press - 5 Jun 2015
DateE-pub ahead of print (current) - 20 Mar 2017
Early online date20/03/17
Original languageEnglish

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 (GECM). Applying it to a wide range of international spot-futures market pairs, we document pervasive evidence of noise momentum around the world

    Research areas

  • limited arbitrage; noise momentum; initial mispricing correction; futures and spot prices

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