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De Long et al (1990) propose that Noise Trading Model is a new
approach to the study of excess volatility.In their opinion
,the reason that stock prices deviate from market fundamentals
is that there exist Noise Traders, who make rational investor
of short-term investment and risk aversion allow stock price to
contain noise premium.They also believe that stock holders are
susceptible to suffer Noise Trader Risk because of the
existence of Noise Traders. This study,based on the papers on
excess volatility in the past decade,designs a more appropriate
empirical model to test whether there exists noise trading in
the stock market in Taiwan by using the regression model of
Scott(1985) revised by Durlauf & Hall(1989) and by using market
fundamentals set by different holding period. This study uses
62 sample companies on the market as empirical analysis drawing
data from the first quarter of 1982 to the third quarter of
1992.The empirical result shows that most stock prices suffer
noise trader risk to different degrees except some blue chips
and high risk premium stocks.Hence,it cannot be denied that
there exists noise trading in Taiwan''s stock market.It can be
observed that even in extended holding periods,noise trader
risk cannot be totally avoided in long-term investment although
the risk is lower.
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