Silencing the Noise, Amplified Effects: Causal Study on Price Efficiency

Abstract

I study the effects of noise trading on price efficiency by employing a novel causal identification strategy. In September 2022, an unexpected internet disruption severely limited noise traders in the Iranian stock market, while informed traders maintained stable access to trading platforms through their brokers. I document a 6.65-fold increase in the bid-ask spread and a 46.8% decrease in trade speed due to market access asymmetry. Additionally, social media censorship contributed to information asymmetry, resulting in a 32.5% close price divergence in restricted regions. This paper empirically confirms Kyle's 1985 theoretical model, demonstrating that noise traders significantly improve market efficiency.

Keywords: Noise traders, Informed traders, Information asymmetry, Market clearing, Market access, Stock exchange, Causal study, Settlement microstructure, Differences-in-Differences(DiD)