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

49 Pages Posted: 21 Apr 2004

See all articles by Jennifer L. Koski

Jennifer L. Koski

University of Washington - Michael G. Foster School of Business

Edward M. Rice

University of Washington - Michael G. Foster School of Business

Ali Tarhouni

University of Washington - Michael G. Foster School of Business

Date Written: April 8, 2004

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

Suggested Citation

Koski, Jennifer Lynch and Rice, Edward M. and Tarhouni, Ali, Noise Trading and Volatility: Evidence from Day Trading and Message Boards (April 8, 2004). Available at SSRN: https://ssrn.com/abstract=533943 or http://dx.doi.org/10.2139/ssrn.533943

Jennifer Lynch Koski (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-7975 (Phone)
206-685-9392 (Fax)

Edward M. Rice

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Ali Tarhouni

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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