Noise Momentum Around the World

26 Pages Posted: 15 Mar 2018

See all articles by Charlie X. Cai

Charlie X. Cai

University of Bradford - School of Management

Robert W. Faff

Bond University; University of Queensland

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies

Date Written: March 2018

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.

Keywords: Futures and spot prices, Initial mispricing correction, Limited arbitrage, Noise momentum

Suggested Citation

Cai, Charlie X. and Faff, Robert W. and Shin, Yongcheol, Noise Momentum Around the World (March 2018). Abacus, Vol. 54, Issue 1, pp. 79-104, 2018, Available at SSRN: https://ssrn.com/abstract=3140842 or http://dx.doi.org/10.1111/abac.12101

Charlie X. Cai (Contact Author)

University of Bradford - School of Management ( email )

Emm Lane
Bradford, West Yorkshire Bd9 4JL
United Kingdom

Robert W. Faff

Bond University ( email )

Gold Coast, QLD 4229
Australia

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

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