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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26416
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| Title: | The Limits of Noise Trading: An Experimental Analysis |
| Authors: | Bloomfield, Robert
O’Hara, Maureen
Saar, Gideon |
| Issue Date: | Jan-2005 |
| Series/Report no.: | FIN-05-015 |
| Abstract: | In this research we investigate the behavior of noise traders and their
impact on the market. We do this in an experimental market setting that
allows us to determine not only how noise traders fare in a competitive
asset market with other traders, but also how the equilibrium changes if
a securities transactions tax (“Tobin tax”) is imposed. We
find that noise traders lose money on average: they do not engage in
extensive liquidity provision, and their attempt to make money by trend
chasing is unsuccessful as they lose most in securities whose prices
experience large moves. Noise traders adversely affect the informational
efficiency of the market: they drive prices away from fundamental
values, and the further away the market gets from the true value, the
stronger this effect becomes. With a securities transaction tax, noise
traders submit fewer orders and lose less money in those securities that
exhibit large price movements. The tax is associated with a decrease in
market trading volume, but informational efficiency remains essentially
unchanged and liquidity (as measured by the price impact of trades)
actually improves. We find no significant effect, however, on market
volatility, suggesting that at least this rationale for a securities
transaction tax is not supported by our data. |
| URI: | http://hdl.handle.net/2451/26416 |
| Appears in Collections: | Finance Working Papers
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