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Noise trading and the management of operational risk; firms, traders and irrationality in financial markets

Willman, Paul; Fenton-O'Creevy, Mark; Nicholson, Nigel and Soane, Emma (2006). Noise trading and the management of operational risk; firms, traders and irrationality in financial markets. Journal of Management Studies, 43(6) pp. 1357–1374.

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DOI (Digital Object Identifier) Link: https://doi.org/10.1111/j.1467-6486.2006.00648.x
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Abstract

Efficient market models cannot explain the high level of trading in financial markets in terms of asset portfolio adjustment. It is presumed that much of this excessive trading is irrational 'noise' trading. A corollary is that there must either be irrational traders in the market or rational traders with irrational aberrations. The paper reviews the various attempts to explain noise trading in the finance literature concluding that the persistence of irrationality is not well explained. Data from a study of 118 traders in four large investment banks are presented to advance reasons why traders might seek to trade more frequently than financial models predict. The argument is advanced that trades do not simply occur in order to generate profit, but it does not follow that such trading is irrational. Trading may generate information, accelerate learning, create commitments and enhance social capital, all of which sustain traders' long term survival in the market. The paper treats noise trading as a form of operational risk facing firms operating in financial markets and discusses approaches to the management of such risk.

Item Type: Journal Item
Copyright Holders: 2006 Blackwell Publishing Ltd
ISSN: 0022-2380
Keywords: operational risk; organisational control; financial markets; traders; noise trading; agency theory
Academic Unit/School: Faculty of Business and Law (FBL) > Business > Department for People and Organisations
Faculty of Business and Law (FBL) > Business
Faculty of Business and Law (FBL)
Item ID: 10040
Depositing User: Mark Fenton-O'Creevy
Date Deposited: 07 Jan 2008
Last Modified: 07 Dec 2018 11:08
URI: http://oro.open.ac.uk/id/eprint/10040
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