How Noise Trading Affects Markets: An Experimental Analysis

Posted: 1 Jun 2009

See all articles by Robert J. Bloomfield

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 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

Suggested Citation

Bloomfield, Robert J. and O'Hara, Maureen and Saar, Gideon, How Noise Trading Affects Markets: An Experimental Analysis (June 2009). The Review of Financial Studies, Vol. 22, Issue 6, pp. 2275-2302, 2009. Available at SSRN: https://ssrn.com/abstract=1408433 or http://dx.doi.org/hhn102

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
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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

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

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