Journal
REVIEW OF FINANCIAL STUDIES
Volume 22, Issue 6, Pages 2275-2302Publisher
OXFORD UNIV PRESS INC
DOI: 10.1093/rfs/hhn102
Keywords
D03; G12; G14
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We use a laboratory market to investigate the behavior of traders who lack informational advantages and have no exogenous reason to trade. We find that these uninformed traders behave largely as irrational contrarian noise traders, trading against recent price movements to their own detriment. The uninformed traders provide some benefits to the market: increasing market volume and depth, while reducing bid-ask spreads and the temporary price impact of trades. However, their noise trading also diminishes the ability of market prices to adjust to new information. A securities transaction tax reduces uninformed trader activity, but it reduces informed trader activity by approximately the same amount; as a result, the tax does not alter the impact of noise trading on the informational efficiency of the market.
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