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

We study the extent to which, in a laboratory …nancial 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 …nd that, in the laboratory, the noise due to the irrational use of private information Acknowledgements: We gratefully acknowledge the …nancial support of the C.V. Starr Center and the Center for Experimental Social Science (CESS) at New York University. Guarino also gratefully ackowledges the …nancial support of the ELSE Center at University College London and of the Leverhulme Trust. All errors are ours. yE-mail addresses: Cipriani: [email protected]; Guarino: [email protected].