NOISE TRADING IN A LABORATORY FINANCIAL MARKET: A MAXIMUM LIKELIHOOD APPROACH | Zendy

Cipriani Marco | Zendy; Guarino Antonio | Zendy

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NOISE TRADING IN A LABORATORY FINANCIAL MARKET: A MAXIMUM LIKELIHOOD APPROACH

Author(s) -

Cipriani Marco,

Guarino Antonio

Publication year - 2005

Publication title -

journal of the european economic association

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 7.792

H-Index - 93

eISSN - 1542-4774

pISSN - 1542-4766

DOI - 10.1162/jeea.2005.3.2-3.315

Subject(s) - economics , financial market , noise (video) , maximum likelihood , business , financial economics , finance , computer science , statistics , mathematics , artificial intelligence , image (mathematics)

We 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)

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