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

Author

Listed:
  • 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 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.

Suggested Citation

  • Raphael Flepp & Stephan Nüesch & Egon Franck, 2013. "Liquidity, Market Efficiency and the Influence of Noise Traders: Quasi-Experimental Evidence from the Betting Industry," Working Papers 341, University of Zurich, Department of Business Administration (IBW).
    • Handle: RePEc:zrh:wpaper:341
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    Cited by:

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    More about this item

    Keywords

    Liquidity; Market Efficiency; Noise Trading; Betting Market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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