The Impact of Noise Traders on Macrodynamics

Abstract

This study constructs a closed economy dynamic stochastic general equilibrium (DSGE) model with noise traders to study the processes of change which occur throughout stock market and macroeconomy. The study finds that the noise-trader shocks on expected share return directly affect the stock market through their excess demand for shares and indirectly affect the macroeconomy through the changes in behaviors of households and good producers. The positive noise-trader shocks increases share price which implies that share return decreases. Then, the informed traders prefer selling their shares because of over-price share. The noise traders get loss after share price declines. However, they still buy shares at lower price level since they believe an average buying strategy is the best way. For changes in behaviors, the noise traders work more but consume less since they prefer holding more shares while the informed traders behave opposite because they get higher income. Last, an increase in aggregate employment requires the higher investment in order to product more goods.