Noise Trading and Asset Pricing Factors

We demonstrate that a broad set of asset pricing factors/anomalies are significantly exposed to “noise trader risk,” and the noise trader risk is priced in factor premia. We first confirm that mutual funds’ flow-induced trading of factors are uninformed, as they generate a large price impact on factor returns, followed by a complete reversal. We then show that asset pricing factors are subject to flow-driven noise trader risk in that expected variation (covariation) of flow-induced noise trading strongly forecasts variance (covariance) of factor returns. Importantly, factor premia are higher when flow-driven noise trader risk is expected to be more salient. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01827 .

• 저널Management Science · 71(8) · 6961–6978
• 토픽Financial Markets and Investment Strategies · Finance
• DOI10.1287/mnsc.2022.01827
• 저자Shiyang Huang, Yang Song, Hong Xiang