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
Date Written: November 1, 2014
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: Suggested Citation