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.
| Original language | English |
|---|---|
| Pages (from-to) | 79-104 |
| Number of pages | 26 |
| Journal | Abacus |
| Volume | 54 |
| Issue number | 1 |
| Early online date | 20 Mar 2017 |
| DOIs | |
| Publication status | Published - Mar 2018 |
| Externally published | Yes |