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Liquidity, Market Efficiency and the Influence of Noise Traders: Quasi-Experimental Evidence from the Betting Industry

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Author Info

  • Raphael Flepp

    ()
    (Department of Business Administration, University of Zurich)

  • Stephan Nüesch

    ()
    (Department of Business Administration, University of Zurich)

  • Egon Franck

    ()
    (Department of Business Administration, University of Zurich)

Abstract

This paper examines how liquidity affects market efficiency in a market environ- ment where securities fundamental values are revealed at a predetermined point in time. We employ differences in minimum tick sizes at the betting exchange Betfair which induce exogenous variation in liquidity. The results show that liquidity signif- icantly decreases market efficiency for bets on weekend matches but not for bets on weekday matches. As uninformed noise bettors are more likely to bet on weekends than on weekdays, the type of liquidity seems to matter for market efficiency.

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File URL: http://repec.business.uzh.ch/RePEc/zrh/wpaper/341_IBW_full.pdf
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Bibliographic Info

Paper provided by University of Zurich, Department of Business Administration (IBW) in its series Working Papers with number 341.

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Length: 29 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:zrh:wpaper:341

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Keywords: Liquidity; Market Efficiency; Noise Trading; Betting Market;

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