Noise Trading and Volatility: Evidence from Day Trading and Message Boards

Abstract

This paper tests the hypothesis that noise trading increases volatility. We argue that day traders are noise traders, and we use stock message board postings on Raging Bull and Yahoo to proxy for day trading. We find evidence that day trading increases volatility for a sample of large NASDAQ stocks during the 3rd quarter of 1999. Regulators have expressed concern that day trading destabilizes stock prices. Although we support the argument that day trading causes some increase in volatility, our results suggest that the direction of causation is primarily the reverse.

Keywords: Noise Trading, Volatility, Day Trading, Message Boards, Market Efficiency

JEL Classification: G12, G14