Noise Trader Risk


DEFINITION of 'Noise Trader Risk'

A form of market risk associated with the investment decisions of noise traders. The higher the volatility in market price for a particular security, the greater the associated noise trader risk

BREAKING DOWN 'Noise Trader Risk'

Behavioral finance researchers have attempted to isolate this risk in order to explain and capitalize upon the sentiment of the majority of investors. Noise trader risk is assumed to be more readily found in small-cap stocks, but has also been identified mid- and large-caps.

For example, if the noise trader risk for a particular stock is high, an issuance of good news related to a particular company may influence more noise traders to buy the stock, artificially inflating its market value.

  1. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  2. Noise

    Price and volume fluctuations in the market that can confuse ...
  3. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
  4. Noise Trader

    The term used to describe an investor who makes decisions regarding ...
  5. Efficient Market Hypothesis - EMH

    An investment theory that states it is impossible to "beat the ...
  6. Fundamental Analysis

    A method of evaluating a security that entails attempting to ...
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