Abstract

http://ssrn.com/abstract=680786
 
 

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The Limits of Noise Trading: An Experimental Analysis


Robert J. Bloomfield


Cornell University - Samuel Curtis Johnson Graduate School of Management

Maureen O'Hara


Cornell University - Samuel Curtis Johnson Graduate School of Management

Gideon Saar


Cornell University - Samuel Curtis Johnson Graduate School of Management

November 2005

AFA 2006 Boston Meetings Paper

Abstract:     
We report the results of a laboratory market experiment that allows us to determine not only how noise traders fare in a competitive asset market with other traders, but also how the equilibrium changes if a securities transaction tax ("Tobin tax") is imposed. We find that noise traders lose money on average: they do not engage in extensive liquidity provision, and their attempt to make money by trend chasing is unsuccessful as they lose most in securities whose prices experience large moves. Noise traders adversely affect the informational efficiency of the market by driving prices away from fundamental values. With a securities transaction tax, noise traders submit fewer orders and lose less money in those securities that exhibit large price movements. The tax is associated with a decrease in market trading volume, but informational efficiency remains essentially unchanged and liquidity (as measured by the price impact of trades) actually improves. We find no significant effect, however, on market volatility, suggesting that at least this rationale for a securities transaction tax is not supported by our data.

Number of Pages in PDF File: 46

Keywords: behavioral finance, noise, limits to arbitrage, day trading, experiments, Tobin tax, securities transactions tax, informational efficiency, liquidity, volatility

JEL Classification: G10, C92

working papers series


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Date posted: March 15, 2005  

Suggested Citation

Bloomfield, Robert J. and O'Hara, Maureen and Saar, Gideon, The Limits of Noise Trading: An Experimental Analysis (November 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=680786 or http://dx.doi.org/10.2139/ssrn.680786

Contact Information

Robert J. Bloomfield
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)
Maureen O'Hara
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)
Gideon Saar (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
455 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Saar/
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