Noise Trading and Market Efficiency

Abstract

Due to significant agency costs, so called “passive investors” are more likely to engage in speculation and positive feedback trading than in actual passive investment strategies. As a result, all other markets participants engage in some form of willing/unwilling positive feedback trading, which is likely to produce significant and persistent price bubbles. The suspected behavior of “passive investors” is, we argue, the major reason why markets might not be efficient.

TOPICS: Passive strategies, security analysis and valuation, portfolio theory