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Learning from experience and trading volume

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  • Subrahmanyam, Avanidhar

Abstract

We build a model where trading allows inexperienced agents to discern useful information sources. Upon losing money by trading on invalid information sources, investors learn from their experience and switch to alternative sources. Such activity leads to initial expected losses but later profitable trades. Trading activity is found to be increasing in the mass of such agents. Volume is greatest in firms with uncertain cash flows. Further, a greater number of information sources implies greater volume. This is consistent with the explosive growth in volume accompanying the growth of the internet, which presumably increases the number of heterogeneous information sources.

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 17 (2008)
Issue (Month): 4 (December)
Pages: 245-260

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Handle: RePEc:eee:revfin:v:17:y:2008:i:4:p:245-260

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Web page: http://www.elsevier.com/locate/inca/620170

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Keywords: Trading volume Private information Market microstructure;

References

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  1. Tkac, Paula A., 1999. "A Trading Volume Benchmark: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 89-114, March.
  2. Foster, F Douglas & Viswanathan, S, 1993. " Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models," Journal of Finance, American Finance Association, vol. 48(1), pages 187-211, March.
  3. Forsythe, Robert & Lundholm, Russell & Rietz, Thomas, 1999. "Cheap Talk, Fraud, and Adverse Selection in Financial Markets: Some Experimental Evidence," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 481-518.
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  7. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  8. Massimo Guidolin & Allan Timmerman, 2005. "Properties of equilibrium asset prices under alternative learning schemes," Working Papers 2005-009, Federal Reserve Bank of St. Louis.
  9. Cars H. Hommes, 2005. "Heterogeneous Agent Models in Economics and Finance," Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute.
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  13. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
  14. Brad M. Barber & Terrance Odean, 2001. "The Internet and the Investor," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 41-54, Winter.
  15. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  16. Andrew W. Lo & Dmitry V. Repin & Brett N. Steenbarger, 2005. "Fear and Greed in Financial Markets: A Clinical Study of Day-Traders," NBER Working Papers 11243, National Bureau of Economic Research, Inc.
  17. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  18. Bray, Margaret M, 1981. "Futures Trading, Rational Expectations, and the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 49(3), pages 575-96, May.
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