The Survival of Noise Traders: Evidence From Peer-to-Peer Lending

46 Pages Posted: 23 Jun 2018  

Mingfeng Lin

Scheller College of Business, Georgia Institute of Technology

Richard W. Sias

University of Arizona - Department of Finance

Zaiyan Wei

Purdue University - Krannert School of Management

Date Written: May 2018

Abstract

Using detailed transactions data from a peer-to-peer lending market we present the first direct evidence that, when faced with identical information sets, sophisticated institutional investors exploit less sophisticated retail investors. Consistent with classic economic theory, our results suggest that the relative role of less sophisticated "noise traders" will decline over time and, as a result, they will eventually become unimportant. Our results also demonstrate, however, that this does not occur quickly — it would take more than four centuries of exploitation by sophisticated investors for noise traders' fraction of market wealth to fall from 50% to 10%.

Keywords: Noise Traders, Peer-to-Peer Lending, FinTech, Retail Investors, Institutional Investors

JEL Classification: G10, G11, G14, G18, G23, G4

Suggested Citation

Lin, Mingfeng and Sias, Richard W. and Wei, Zaiyan, The Survival of Noise Traders: Evidence From Peer-to-Peer Lending (May 2018). Georgia Tech Scheller College of Business Research Paper No. 18-22. Available at SSRN: https://ssrn.com/abstract=3185608 or http://dx.doi.org/10.2139/ssrn.3185608

Mingfeng Lin

Scheller College of Business, Georgia Institute of Technology ( email )

United States

Richard W. Sias (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Zaiyan Wei

Purdue University - Krannert School of Management ( email )

100 Grant St
West Lafayette, IN 47907-2076
United States
(765) 494-5958 (Phone)

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