Noise Trading in a Laboratory Financial Market: A Maximum Likelihood Approach
AbstractWe study the extent to which, in a laboratory financial market, noise trading can stem from subjects' irrationality. We estimate a structural model of sequential trading by using experimental data. In the experiment, subjects receive private information on the value of an asset and trade it in sequence with a market maker. We find that, in the laboratory, the noise due to the irrational use of private information accounts for 35% of the decisions. When subjects act as noise traders, they abstain from trading 67% of the time. When they trade, the probability that they buy is significantly higher than the probability that they sell. (JEL: C92, D8, G14) Copyright (c) 2005 The European Economic Association.
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Bibliographic InfoArticle provided by MIT Press in its journal Journal of the European Economic Association.
Volume (Year): 3 (2005)
Issue (Month): 2-3 (04/05)
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Find related papers by JEL classification:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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