Noisy market hypothesis
What is the noisy market hypothesis?
The noisy market hypothesis is a financial theory that argues that the true underlying value of a company is not always efficiently calculated by looking solely at the prices of its securities. This is in contrast to the more widely acknowledged efficient market hypothesis.
Where have you heard about the noisy market hypothesis?
The noisy market hypothesis was first brought to the public attention by well-known investor and analyst Jeremy J. Siegel, who also wrote the popular Stocks for the Long Run. He described it in great detail in the Wall Street Journal in 2006, where it was met with divided opinion.
What you need to know about the noisy market hypothesis.
Siegel’s hypothesis puts forward the argument that the prices of securities can be influenced by momentum traders and speculative investors. In addition, investors and various institutions will often trade stocks for multiple reasons – such as to influence liquidity, avoid taxes and diversify their portfolios – that are not obviously linked to the stocks’ base value. Siegel claims that these trades and influences, which he refers to as ‘noise’, can lead to securities being mispriced because their real value is difficult to accurately calculate.
Find out more about the noisy market hypothesis.
To understand the noisy market hypothesis, it’s helpful to also learn about the efficient market hypothesis.