We consider the Kyle-Back model for insider trading, with the difference that the classical Brownian motion noise of the noise traders is replaced by the noise of a fractional Brownian motion BH with Hurst parameter H > 12 (when H = 1 2 , B H coincides with the classical Brownian motion). Heuristically, for H > 12 this means that the noise traders has some “memory”, in the sense that any increm...

This paper provides evidence that “illusory correlations,” a well-documented source of cognitive bias, leads some agents to be imperfectly rational noise traders. We identify illusory correlations by focusing on the head-and-shoulders chart pattern. Though this is considered one of the most reliable technical trading signals, our evidence indicates that the signal does not profitably predict di...

We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational and their interpretation of prices injects noise into the price system, which serves as a source of endogenous noise trading. Compared to the standard rational expectations equilibrium, our setup features price momentum and yields higher return vo...

Partially observed microstructure models, containing stochastic volatility, dynamic trading noise, and short-term inertia, are introduced to address the following questions: (1) Do the observed prices exhibit statistically significant inertia? (2) Is stochastic volatility (SV) still evident in the presence of dynamical trading noise? (3) If stochastic volatility and trading noise are present, w...

Informed investors are a source of illiquidity, but those pursuing di¤erently informed strategies also generate quasi -noise trading. Quasi-noise trading creates non-monotonic externalities in information choice that shape the composition of active investment and that in‡uence investor herding, liquidity spirals, asset comovement, along with the information content of prices. These externalitie...