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How noise trading affects informational efficiency: Evidence from an order-driven market

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  • Zhang, Chris H.
  • Kalev, Petko S.

Abstract

We use full order book data from the Australian Securities Exchange to investigate how noise trading affects informational efficiency of securities prices. In aggregate, noise trading harms price efficiency. However, this is driven mainly by higher levels of noise trading, indicating a non-linear effect. Further, behind the aggregate effects lies rich heterogeneity in how noise trading affects informational efficiency cross-sectionally. Noise trading harms informational efficiency of large and liquid stocks but can be beneficial in small and illiquid stocks, indicating that noise trading affects different stocks differently.

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  • Zhang, Chris H. & Kalev, Petko S., 2021. "How noise trading affects informational efficiency: Evidence from an order-driven market," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x21001128
    DOI: 10.1016/j.pacfin.2021.101605
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    1. Chu, Gang & Dowling, Michael & Shen, Dehua & Zhang, Yongjie, 2023. "Information demand density matters: Evidence from the post-earnings announcement drift," International Review of Financial Analysis, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    Market microstructure; Noise trading; Belief dispersion; Informational efficiency;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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