Liquidity, Market Efficiency and the Influence of Noise Traders: Quasi-Experimental Evidence from the Betting Industry

University of Zurich, Department of Business Administration, UZH Business Working Paper No. 341

28 Pages Posted: 23 Dec 2013 Last revised: 3 Nov 2014

See all articles by Raphael Flepp

Raphael Flepp

University of Zurich - Department of Business Administration (IBW)

Stephan Nüesch

University of Muenster

Egon P. Franck

University of Zurich - Department of Business Administration (IBW)

Date Written: November 1, 2014

Abstract

This paper examines how liquidity affects market efficiency in a market environment where securities' true values are revealed at a predetermined point in time. We employ differences in minimum tick sizes at the betting exchange Betfair as a source of exogenous variation in liquidity. The results show that liquidity significantly decreases market efficiency for bets on weekend matches but not for bets on weekday matches. Because uninformed noise bettors are more likely to bet on weekends than on weekdays, our results indicate that the type of liquidity matters for market efficiency.

Keywords: Liquidity, Market Efficiency, Noise Trading, Betting Market

JEL Classification: G12, G14

Suggested Citation

Flepp, Raphael and Nüesch, Stephan and Franck, Egon P., Liquidity, Market Efficiency and the Influence of Noise Traders: Quasi-Experimental Evidence from the Betting Industry (November 1, 2014). University of Zurich, Department of Business Administration, UZH Business Working Paper No. 341. Available at SSRN: https://ssrn.com/abstract=2371204 or http://dx.doi.org/10.2139/ssrn.2371204

Raphael Flepp (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

Stephan Nüesch

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/uf

Egon P. Franck

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich 8032
Switzerland
+41 1 634 28 45 (Phone)

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