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

Abstract

Using detailed transaction data from a natural experiment on 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 traditional economic theory, our results suggest that the relative role of less sophisticated "noise traders" will decline over time and 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 institutional investors for less sophisticated retail 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