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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