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

Raphael Flepp, Stephan Nüesch () and Egon Franck
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Stephan Nüesch: Department of Business Administration, University of Zurich

No 341, Working Papers from University of Zurich, Department of Business Administration (IBW)

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.

Keywords: Liquidity; Market Efficiency; Noise Trading; Betting Market (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013-12
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zrh:wpaper:341

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