Noise Trading in a Laboratory Financial Market: A Maximum Likelihood Approach

Marco Cipriani and Antonio Guarino

Journal of the European Economic Association, 2005, vol. 3, issue 2-3, 315-321

Abstract: 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) Copyright (c) 2005 The European Economic Association.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:tpr:jeurec:v:3:y:2005:i:2-3:p:315-321

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