Investigation of Relationship Between Noise Trading and Share Returns In Iran Stock market

Document Type : Original Article

Authors

1 Ph.D. in Financial Management, Department of Accounting and Financial Management, Tehran University, College of Farabi, Qom, Iran.

2 Assistant Prof., Faculty of Management and Accounting, University of Tehran, Farabi College, Qom, Iran

3 Professor, Department of Financial Management, Tehran University, Tehran, Iran.

4 Assistant Prof, Department of Accounting and Financial Management, Tehran University, College of Farabi, Qom, Iran.

Abstract

The return volatility in financial markets depends heavily on the nature, behavior and desires of the trader. The aim of this study is to determine the appropriate trading strategy in Iran stock market based on the behavior of noise traders. In order to achieve this research aims, related data to total index and 96 selected companies has been used. The results of daily fluctuation analysis of the total index by using the Chow-analysis multiple variance test (CD) during the five-year period from 2011 to 2016 showed that the common culture of traders on Iranian stock market is noise trading. Statistically significant Behavioral Error (BE) of Iranian stock market traders point out that this market faces the noise trader risk (NTR). So the results of the survey of the effect of noise trader risk (NTR) lagging value on the stocks retune of the selected companies by using a two-variable regression model indicate that: firstly, noise traders have a significant effect on stock returns in this market, and secondly, the systematic noise effect (SNE) overcomes cash noise effect (CNE), That means that noise traders by adopting a noisy strategy and expanding their risk exposure on market can earn more than information traders with reverse strategy. The results of this research can help investors to adopt a suitable trading strategy and competent authorities to apply mechanisms to reduce noisy transactions.

Keywords

References

  1. Abbasian, E; & Farzanegan, E. (2012). Tehran Stock Exchange Bubbles and Noise Traders Behavior. Journal of Economic Research (Tahghighat-E-Eghtesadi), 46(3), 133-153 (In Persian).
  2. Ataabadi, A, A., & Hamidi, M. (2017). Over-Reaction To Earning Adjustment Based On Event Study Approach: Evidence From Tehran Stock Exchange. Journal of Financial Management Perspective, 7(17), 31-48 (In Persian).
  3. Black, F. (1986). Noise. Journal of Finance, 3, pp: 529-543.
  4. Bloomfield, R., O’Hara, M., & Saar, G. (2009). How Noise Trading Affects Markets: An Experimental Analysis. The Review of Financial Studies, 22(6), 2275–2302.
  5. Campbell, J. Y., & Kyle, A, S. (1988). Smart Money, Noise Trading and Stock Price Behavior. Review of Economic Studies, 60(202), 1-34.
  6. Cheng, Po-Keng. (2018).Noise traders, State University of New York, Stony Brook University, USA. (Editor by Mehdi Khosrow-Pour, D.B.A, Information Resources Management Association, USA).
  7. Colletaz, G. (2006). A Simple Multiple Variance-Ratio Test Based on Ranks. Journee d’econometrie ”Developpements recents de l’econometrie appliquee à la finance, Paris X-N. .
  8. De Long, B; Shleifer, A; Summers, L; Waldmann, J .R. (1990). Noise trader risks in financial markets. Journal of Political Economy, 4, 703-738.
  9. Friedman, M. (1953), "The case for flexible exchange rates”. Essays on Positive Economics, University of Chicago Press, Chicago, IL.
  10. Ghalmegh, K; Yaghoobnezhad, A; Falah Shams, M. (2017). The Effect of Financial Literacy on Behavioral Basic in Tehran Stock Market Investors. Journal of Financial Management Perspective, 6(16), 75-94 (In Persian).
  11. Hsieh, Tsung-Yu., Lee I, Huai., Tsai, Ying-Ru. (2018). Idiosyncratic Risk, Stock Returns and Investor Sentiment. Asian Economic and Financial Review, 8(7), 853-869.
  12. Hsu, C, H. (2016). Strategic noise trading of later-informed traders in a multi-market framework. Economic Modeling, 54, 235-243.
  13. Hu, C., & Wang, Y. (2013). Noise trading and stock returns: evidence from Chin. China Finance Review International, 3(3), 301–315.
  14. Hughen, J. Christopher; McDonald, G. Cynthia. (2005). WHO ARE THE NOISE TRADERS? Journal of Financial Research, 28(2), 281-298
  15. Khasawneh, O, A. (2017). Noise trading in small markets: Evidence from Amman Stock Exchange (ASE). Research in International Business and Finance, 42, 422–428.
  16. Kim, T; Ha, A. (2010). Investor Sentiment and Market Anomalies. 23rd Australasian Finance and Banking Conference, Paper, Available at www.ssrn.com.
  17. Levich, M, R. (1998). International Financial Markets, Prices and Policies. New York: McGraw-Hill International Edition.
  18. Mei-Chen, L. (2010). The Effects of Investor Sentiment on Returns and Idiosyncratic Risk in the Japanese Stock Market. International Research Journal of Finance and Economics, 60, 29 – 43.
  19. Nademi, Y., & Salem, A, A. (2016). An Investigation of the Hypothesis of Weak Form of Efficiency in Two Regimes of High & Poor Volatility in Tehran Stock Exchange. Quarterly Journal of Economic Research and Policies, 24(77), 139-162 (In Persian).
  20. Raie, Reza; Hoseini, Seyed Farhang; Kiani Harchegani, Maedeh. (2016). Evaluate the Ability of Social Networks to Predict the Direction and Stock Prices in Tehran Stock Exchange. Journal of Investment Knowledge, 5(19), 107-128 (In Persian).
  21. Rajgopal, S. and Venkatachalam, M. (2011) Financial Reporting Quality and Idiosyncratic Return Volatility. Journal of Accounting and Economics, 51, 1-20.
  22. Ramiah, V; Davidson, S. (2007). An information-adjusted noise model: evidence of inefficiency on the Australian stock market. Journal of Behavioral Finance, 8(4), 209-224.
  23. Ramiah, V., & Davidson, S. (2010). Inefficiency of the Australian stock market. The Behavioral Finance Handbook, Chapter 19, Edward Elgar, 379-389.
  24. Shefrin, H., & Statman, M. (1994). Behavioral capital asset pricing theory. Journal of Financial and Quantitative Analysis, 29, 323-349.
  25. Shiller, R., Fischer, S., & Friedman, B. (1984). Stock Prices and Social Dynamics. Brookings Papers on Economic Activity, 1984(2), 457-510.
  26. Shleifer, A. (1961). Inefficient markets: an introduction to behavioral finance, (Sinaee and mohammadi, 2016), Ahvaz, University of Chamran.
  27. Shleifer, A., summers, L, H. (1990). The Noise Trader Approach to Finance. Journal of Economic Perspectives, 4(2), 19-33.
  28. Taghian Dinani, Z., & Farid, D. (2015). The Relationship between Excess Return of the Momentum Strategy and Systematic Risk in Tehran Stock Exchange. Journal of Financial Management Perspective, 6(16), 9-30 (In Persian).
  29. Xu, X., Ramiah, V; Imad, M., &Davidson, S. (2016). An application of the information-adjusted noise model to the Shenzhen stock market. International Journal of Managerial Finance, 12(1), 71-91.

Files

Share

How to cite

Statistics