Noise trader risk: the case of Jewish Colonial Trust and Bank Leumi Stocks

Abstract

Jewish Colonial Trust (JCT) and Bank Leumi Le-Israel (BLL), called here the sub-company and the main company, are two companies whose stocks are traded on the Tel Aviv Stock Exchange (TASE). We demonstrate that although the assets of the sub company consist solely of the stocks of the main company (accounting for 5% of that company's total shares), and that most of the sub company's shares are held by only a few major stockholders, a Noise Trader Risk (NTR) exists. The NTR causes the market value of the sub company to deviate from its theoretical value and the prices of the two stocks not to move together. The NTR, however, decreases as the awareness of the investors regarding the sub company's theoretical value increases, and as the return horizon becomes longer.