Volume 9 Number 2 Jun 2016 Published by Airiti Press Inc. Taipei office: 18F, No. 80, Sec. 1, Chenggong Rd., Yonghe Dist., New Taipei City 23452, Taiwan, R.O.C. International Journal of Intelligent Technologies and Applied Statistics Vo l. 9, No. 2 Jun. 2016 ISSN 1998-5010 Copyright © 2016 by Airiti Press Inc. All rights reserved. To subscribe write to: International Journal of Intelligent Technologies and Applied Statistics (IJITAS), 18F, No. 80, Sec. 1, Chenggong Rd., Yonghe Dist., New Taipei City 23452, Taiwan, R.O.C. Phone: (886) 2-2926-6006, Fax: (886) 2-2923-5151 E-mail: [email protected] Printed in Taiwan. International Journal of Intelligent Technologies and Applied Statistics Vol. 9, No. 2 Jun. 2016 CONTENTS The Impact of Noise Traders on Macrodynamics 91 Panupong Sukkerd Do Copulas Improve an Eff iciency of Seemingly Unrelated Regression Model? 105 Pathairat Pastpipatkul, Paravee Maneejuk and Songsak Sriboonchitta Trade Offs of Income between Crops for Agricultural Purpose and Energy Purpose in a Community Level 123 Montri Singhavara, Aree Wiboonpongse, Yaovarate Chaovanapoonphol and Thaworn Onpraphai A Cluster Analysis of Bank Lending Behavior by Using Self-Organizing Map: The Case of Japan 145 Satoru Kageyama Examining Interdependencies among International Gold and 5-ASEAN Stock Markets through the Conditional Correlations 153 Giam Quang Do and Chaiwat Nimanussornkul Determinants of Green Cluster Supply Chain Adoption and Practice of Arabica Coffee Growers in Pang Ma-O and Pamiang Areas 169 Chanita Panmanee and Aree Wiboonpongse INTERNATIONAL JOURNAL OF INTELLIGENT TECHNOLOGIES AND APPLD IE STATT IS ICS VOL.9, NO.2 (2016) PP.91-104, DOI: 10.6148/IJITAS.2016.0902.01 © Airiti Press The Impact of Noise Traders on Macrodynamics Panupong Sukkerd* Faculty of Economics, Kasetsart University Sri Racha Campus, Chon Buri, Thailand 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. K eywords: Macrodynamics; Noise traders; DSGE; Stock market 1. Rationale In the stock market, there are some investors trading shares on imperfect information as if they traded on prefect one. Those investors are called as noise traders and their financial activity is called as a noise trading. That is, their trading causes the excess price volatility and they can gain the benefit from this inefficient market. However, all of them also have to bear risk in order to take a chance to gain the excess return. Some noise traders are definitely able to beat the market and get extra return while others become losers. Furthermore, the volatility also has the harmful effect on the informed traders, investors rationally trade shares, because the change in share price directly affects to their return. Those investors may not invest in the firms if share price is so volatile. However, there are possibilities that the behavior of noise traders may affect not * Corresponding author: [email protected] 92 Sukkerd only the stock market, but also real markets such as labor market and good market. This ambiguity motivates us to construct the dynamic macroeconomic model with stock market to answer whether noise trading affects the real sector as well as how interaction between variables in stock market and macroeconomy. The impulse response of dynamic stochastic general equilibrium (DSGE) model is a powerful instrument to reveal the change in economic behavior so we create our stylized model to generate the macrodynamic results. The results help us to understand the different trading behaviors between informed and noise traders. Furthermore, those results can reveal the difference in their decision of consumption and work which affect to good producers as well. This study describes three sectors in model as households, financial intermediary and good producers. Then, we will simulate the model by differing the noise-trader shocks on the dynamic macroeconomy. Last, we find the conclusion on the impact of noise-trader shocks on macrodynamics. 2. Noise trader The conventional wisdom mentions that the stock price always projects the intrinsic value of stock because it reflects all information of the stock every times, thus all rational investors cannot receive any excess returns from trading the stock [8]. The previous principle is known as the random walk theory. This theory is challenged the alternatives. One of alternatives is the theory of noise trading which argues some investors are possible to make decisions under imperfect information and then those investors usually trade securities irrationally. Furthermore, they sometimes beat the market by receiving the excess returns from market inefficiency. However, their short-term speculative activities also cause a negative externality by magnifying the market volatility. The aspect of noise traders causing volatility is initially proposed by Black [2]. This approach argues that there are noise traders surviving in financial market [2, 7, 9, 18]. Those investors irrationally trade shares because they cannot access perfect information [2, 14, 17]. Their trading strategy causes price distortion and noise-trader risk. Moreover, this risk impedes the price adjustment because it limits the ability of arbitrage. This inefficiency allows noise traders to seek the extra gain by bearing their risk [3, 4, 6, 14]. Noise traders are able to get more return than other types of investors [6], but this statement is inconsistent [15]. However, an exact advantage of noise traders is that they help increase the market liquidity [2, 3]. 3. Model There are three sectors in this model; households (financial intermediary owners and noise traders), financial intermediary (informed traders) and good producers. The Impact of Noise Traders on Macrodynamics 93 3.1 Households First, we assume the amount of households is a unity and the households are heterogeneous. There are 1 – SN financial intermediary owners and SN noise traders in our economy. The variables relating to financial intermediary owners and noise traders are indexed by the subscript I and N, respectively. 3.1.1 Financial intermediary owners The financial intermediary owners supply their labor N I ,t in good producers for receiving the wage W t as compensation. They spend their wealth for consumption CI ,t as well as investing in financial intermediaries F t. Then, financial intermediaries pay F the fund return Rt and an exogenous fraction ω of their profits Πt back to the owners. Last l y, T I,t states the transfer payments. The owners’ period utility function is given by, U I ,t = ln C I ,t + xln(1 – N I ,t ) (1) Their budget constraint is formed as, F CIt,+ F t = WN t It, + R t−− 11 F t +()1 −ω Π+tT It, (2) where x is the labor weight in utility. They try to maximize their lifetime utility (1) subject to their budget constraint (2). Then, we get the optimal conditions for consumption, labor supply and amount of fund as follows, 1 Λ=It, (3) CIt, CIt, Wt = χ (4) 1− NIt, ΛIt,1+ F β ERtt=1 (5) ΛIt, where β is the discount factor, Et denotes the rational expectation operator and the Lagrange multiplier on owners’ budget constraint is presented by ΛI ,t. 94 Sukkerd The shadow price is determined by marginal utility of consumption presented by the Equation (3). An Equation (4) is an intra-temporal condition which represents how financial intermediary owners choose between work and consumption in the same period. We call an Equation (5) that an inter-temporal condition or Euler equation which ensures the owners will smooth their life-time consumption. 3.1.2 Noise traders The noise traders work in good producers for getting wages in order to consume goods and invest themselves in shares S N ,t for saving their wealth. Notice that they trade the shares themselves instead of indirectly trading through financial intermediaries. Their trading strategies rely on imperfect information so they sometimes trade shares irrationally. We apply how noise traders hold shares from the Gertler and Karadi [11]. They gain utility from the amount of consumption C N ,t and disutility from the hours of work N N ,t so the utility function is formed by, U N ,t = ln C N ,t + xln(1 – N N ,t ) (6) Their budget constraint is defined as, SS CNt,,,+ P t S Nt + TF Nt = W t N Nt, ++() P t DIV t S Nt,1 + T Nt , (7) The noise traders’ transaction fee function is approximated by the multiples of the rate of transaction fee adjusted by a scaled factor and the amount of transaction, SS2 (8) TFNt,,=Η−φ ( PSt Nt PS t ) S where Pt stands for the share price, DIV t represents dividends from holding shares, φ is the rate of transaction fee, H is a scaled factor for adjusting an transaction fee base with the frequency of trading per quarter and S stands for the average amount of shares which is normalized to be one without loss of generality.