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A Rational Expectations Equilibrium with Informative Trading Volume

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  • JAN SCHNEIDER

Abstract

A large number of empirical studies find that trading volume contains information about the distribution of future returns. While these studies indicate that observing volume is helpful to an outside observer of the economy it is not clear how investors within the economy can learn from trading volume. In this paper, I show how trading volume helps investors to evaluate the precision of the aggregate information in the price. I construct a model that offers a closed‐form solution of a rational expectations equilibrium where all investors learn from (1) private signals, (2) the market price, and (3) aggregate trading volume.

Suggested Citation

  • Jan Schneider, 2009. "A Rational Expectations Equilibrium with Informative Trading Volume," Journal of Finance, American Finance Association, vol. 64(6), pages 2783-2805, December.
    • Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2783-2805
    DOI: 10.1111/j.1540-6261.2009.01517.x
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