Noisy market hypothesis
Encyclopedia
In finance
, the noisy market hypothesis contrasts the efficient-market hypothesis in that it claims that the prices of securities are not always the best estimate of the true underlying value of the firm. It argues that prices can be influenced by speculators and momentum trader
s, as well as by insiders and institutions that often buy and sell stocks for reasons unrelated to fundamental value, such as for diversification, liquidity and taxes. These temporary shocks referred to as "noise" can obscure the true value of securities and may result in mispricing of these securities for many years.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, the noisy market hypothesis contrasts the efficient-market hypothesis in that it claims that the prices of securities are not always the best estimate of the true underlying value of the firm. It argues that prices can be influenced by speculators and momentum trader
Momentum trader
-Definition:#: A day trader who makes trading decisions based on market volatility resulting from news or incidents happening in the course of a trading day....
s, as well as by insiders and institutions that often buy and sell stocks for reasons unrelated to fundamental value, such as for diversification, liquidity and taxes. These temporary shocks referred to as "noise" can obscure the true value of securities and may result in mispricing of these securities for many years.