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market risk which the presence of noise traders creates in the assets that they hold: their presence raises expected returns … because sophisticated investors dislike bearing the risk that noise traders may be irrationally pessimistic and push asset … also noise trader risk, the average prices of assets will be below fundamental values; one striking example of substantial …
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We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash...
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We model a financial market in which investor beliefs are shaped by representativeness. Investors overreact to a series of good news, because such a series is representative of a good state. A few bad news do not change investor minds because the good state is still representative, but enough...
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