Abstract
What drives intraday traders’ sentiments in the stock markets: information or noise? This paper argues that the market microstructure noise (MMN) manifests intraday traders’ aggregate sentiments depicted by chaotic and noisy market returns. It examines if intraday stock market returns, returns’ variances and higher order moments are erratic, noisy and non-normal. It shows that the intraday Bombay Stock Exchange (BSE) Sensex and National Stock Exchange (NSE) Nifty index returns approximate to zero-mean, zero-variance but skewed and leptokurtic in distributions. In exploring the intraday market index returns, standardisation process reveals noises in the BSE market, but it is evened up in the NSE market. Since intraday traders’ market sentiments and decision choices are behavioural, noisy but adaptive, their decision choices need strategies given that those strategies have numerical “attractions” that determine choice probabilities. We explore the adaptive Experience Weighted Attraction (EWA) learning parameters to show persistent MMN in intraday traders’ adaptive learning behaviours.
Highlights
In a trading day at no new news, the ordered Electrocardiogram (ECG) reports of the traders rarely match the intraday price-charts of any active stock in our known stock markets
In exploring the distributional properties, we examine the Anderson Darling (AD) normality tests for each of the variables of the stock market return, risk of returns, skewness of returns, and kurtosis of returns
We explore the distributional properties of the market microstructure noise (MMN) with the two decay variables of φ and ρ along with the weights of experience strength N(p)
Summary
In a trading day at no new news, the ordered Electrocardiogram (ECG) reports of the traders (fully rational, conscience and mentally sound) rarely match the intraday price-charts of any active stock in our known stock markets. At bull or bear personas, these normal human beings – the intraday traders are subject to greed or fear, desire or distress, love or hates, happiness or despairs, likes or dislikes etc. These make the presence of stock markets as a living entity in the markets (Jaffe, 2010; Summa, 2004)
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