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How Noise Trading Affects Markets: An Experimental AnalysisRobert J. BloomfieldCornell University - Samuel Curtis Johnson Graduate School of Management Maureen O'HaraCornell University - Samuel Curtis Johnson Graduate School of Management Gideon SaarCornell University - Samuel Curtis Johnson Graduate School of Management June 2009 The Review of Financial Studies, Vol. 22, No. 6, pp. 2275-2302, 2009 Abstract: We use a laboratory market to investigate the behavior of traders who lack informational advantages and have no exogenous reason to trade. We find that these uninformed traders behave largely as irrational contrarian “noise traders,” trading against recent price movements to their own detriment. The uninformed traders provide some benefits to the market: increasing market volume and depth, while reducing bid-ask spreads and the temporary price impact of trades. However, their noise trading also diminishes the ability of market prices to adjust to new information. A securities transaction tax reduces uninformed trader activity, but it reduces informed trader activity by approximately the same amount; as a result, the tax does not alter the impact of noise trading on the informational efficiency of the market.
Keywords: D03, G12, G14 Accepted Paper SeriesDate posted: June 1, 2009Suggested CitationContact Information
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