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Disagreement and Learning: Dynamic Patterns of Trade

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  • SNEHAL BANERJEE
  • ILAN KREMER
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    Abstract

    The empirical evidence on investor disagreement and trading volume is difficult to reconcile in standard rational expectations models. We develop a dynamic model in which investors disagree about the interpretation of public information. We obtain a closed-form linear equilibrium that allows us to study which restrictions on the disagreement process yield empirically observed volume and return dynamics. We show that when investors have infrequent but major disagreements, there is positive autocorrelation in volume and positive correlation between volume and volatility. We also derive novel empirical predictions that relate the degree and frequency of disagreement to volume and volatility dynamics. Copyright (c) 2010 the American Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2010.01570.x
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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 4 (08)
    Pages: 1269-1302

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:4:p:1269-1302

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    Cited by:
    1. Dagfinn Rime & Andreas Schrimpf, 2013. "The anatomy of the global FX market through the lens of the 2013 Triennial Survey," BIS Quarterly Review, Bank for International Settlements, December.
    2. John H. Cochrane, 2013. "Finance: Function Matters, not Size," NBER Working Papers 18944, National Bureau of Economic Research, Inc.
    3. Qin, Zhenjiang, 2013. "Speculations in option markets enhance allocation efficiency with heterogeneous beliefs and learning," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4675-4694.
    4. Kondor, P├ęter, 2011. "The more we know on the fundamental, the less we agree on the price," CEPR Discussion Papers 8455, C.E.P.R. Discussion Papers.
    5. Kapetanios, George & Mitchell, James & Shin, Yongcheol, 2014. "A nonlinear panel data model of cross-sectional dependence," Journal of Econometrics, Elsevier, vol. 179(2), pages 134-157.
    6. Weihong HUANG & Wanying Wang, 2012. "Price-Volume Relations in Financial Market," Economic Growth centre Working Paper Series 1209, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
    7. Carl Chiarella & Roberto Dieci & Xue-Zhong He & Kai Li, 2013. "An evolutionary CAPM under heterogeneous beliefs," Annals of Finance, Springer, vol. 9(2), pages 185-215, May.
    8. Zhenjiang Qin, 2012. "Heterogeneous Beliefs, Public Information, and Option Markets," CREATES Research Papers 2012-23, School of Economics and Management, University of Aarhus.
    9. Bruce I. Carlin & Francis A. Longstaff & Kyle Matoba, 2012. "Disagreement and Asset Prices," NBER Working Papers 18619, National Bureau of Economic Research, Inc.

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