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Differential Information and Dynamic Behavior of Stock Trading Volume

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Author Info
Hua He
Jiang Wang
Abstract

This paper develops a multi-period rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock. Investors trade competitively in the stock market based on their private information and the information revealed by the market-clearing prices, as well as other public news. We examine how trading volume is related to the information flow in the market and how investors' trading reveals their private information.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5010.

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Date of creation: Feb 1995
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Handle: RePEc:nbr:nberwo:5010

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lamoureux, Christopher G & Lastrapes, William D, 1994. "Endogenous Trading Volume and Momentum in Stock-Return Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 253-60, April.
  2. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January. [Downloadable!] (restricted)
  3. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
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  4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  5. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  6. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August. [Downloadable!] (restricted)
  7. repec:att:wimass:19921 is not listed on IDEAS
  8. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 2(2), pages 157-88. [Downloadable!] (restricted)
  9. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September. [Downloadable!] (restricted)
  10. Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Blackwell Publishing, vol. 60(2), pages 249-82, April. [Downloadable!] (restricted)
  11. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February. [Downloadable!] (restricted)
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  12. Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February. [Downloadable!] (restricted)
  13. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(2), pages 199-242. [Downloadable!] (restricted)
  14. Campbell, J.Y. & Kyle, A.S., 1988. "Smart Money, Noise Trading And Stock Price Behavior," Papers 95, Princeton, Department of Economics - Financial Research Center.
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  15. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-78, September. [Downloadable!] (restricted)
  16. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kurz, Mordecai & Motolese, Maurizio, 2006. "Risk Premia, diverse belief and beauty contests," MPRA Paper 247, University Library of Munich, Germany. [Downloadable!]
  2. Anirut Pisedtasalasai & Abeyratna Gunasekarage, 2007. "Causal and Dynamic Relationships among Stock Returns, Return Volatility and Trading Volume: Evidence from Emerging markets in South-East Asia," Asia-Pacific Financial Markets, Springer, vol. 14(4), pages 277-297, December. [Downloadable!] (restricted)
  3. Yang, J-H.S. & Satchell, S.E., 2003. "Endogenous Correlation," Cambridge Working Papers in Economics 0321, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June. [Downloadable!]
    Other versions:
  5. Cespa, Giovanni & Vives, Xavier, 2007. "Dynamic trading and asset prices: Keynes vs. Hayek," IESE Research Papers D/716, IESE Business School. [Downloadable!]
    Other versions:
  6. Michael J. Fleming & Eli M. Remolona, 1996. "Price formation and liquidity in the U.S. treasuries market: evidence from intraday patterns around announcements," Research Paper 9633, Federal Reserve Bank of New York. [Downloadable!]
  7. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," CSEF Working Papers 174, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  8. Saffi, Pedro, 2008. "Differences of opinion, information and the timing of trades," IESE Research Papers D/747, IESE Business School. [Downloadable!]
  9. Glen Donaldson & Mark Kamstra, 2004. "Volatility forecasts, trading volume, and the ARCH versus option-implied volatility trade-off," Working Paper 2004-6, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  10. Andrew W. Lo & Jiang W. Wang, 2000. "Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory," NBER Working Papers 7625, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Todd B. Walker, 2005. "How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders," Finance 0509021, EconWPA. [Downloadable!]
    Other versions:
  12. Andreas Krause, 2000. "Microstructure Effects on Daily Return Volatility in Financial Markets," Quantitative Finance Papers cond-mat/0011295, arXiv.org. [Downloadable!]
  13. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets Capital Adequacy Regulation: In Search of a Rationale," Center for Financial Institutions Working Papers 03-06, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  14. Bacchetta, Philippe & van Wincoop, Eric, 2008. "Higher Order Expectations in Asset Pricing," CEPR Discussion Papers 6648, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  15. Yeyati, Eduardo Levy & Schmukler, Sergio L. & Van Horen, Neeltje, 2007. "Emerging market liquidity and crises," Policy Research Working Paper Series 4445, The World Bank. [Downloadable!]
    Other versions:
  16. Kurz, Mordecai, 2006. "Beauty contests under private information and diverse beliefs: how different?," MPRA Paper 233, University Library of Munich, Germany, revised Apr 2006. [Downloadable!]
  17. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers 1406, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
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