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

  • 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)

This paper examines how liquidity affects market efficiency in a market environment where securities' true values are revealed at a predetermined point in time. We employ differences in minimum tick sizes at the betting exchange Betfair as a source of exogenous variation in liquidity. The results show that liquidity significantly decreases market efficiency for bets on weekend matches but not for bets on weekday matches. Because uninformed noise bettors are more likely to bet on weekends than on weekdays, our results indicate that the type of liquidity matters for market efficiency.

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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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  1. Tim Kuypers, 2000. "Information and efficiency: an empirical study of a fixed odds betting market," Applied Economics, Taylor & Francis Journals, vol. 32(11), pages 1353-1363.
  2. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
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  13. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March.
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  24. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
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  30. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
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