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Belief dispersion among household investors and stock trading volume

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  • Dan Li
  • Geng Li
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Abstract

We study the effects of belief dispersion on stock trading volume. Unlike most of the existing work on the subject, our paper focuses on how household investors' disagreements on macroeconomic variables influence market-wide trading volume. We show that greater belief dispersion among household investors is associated with significantly higher trading volume, even after controlling for the disagreements among professional forecasters. Further, we find that the belief dispersion among household investors who are more likely to own stocks has more pronounced effects on trading volume, suggesting a causal relationship. Finally, we show that greater "belief jumbling," or the dispersion of belief changes over a given period, is also related to more active trading during the same period.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-39.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-39

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Keywords: Investments ; Stockholders;

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  1. Goetzmann, William & Massa, Massimo, 2004. "Dispersion of Opinion and Stock Returns," CEPR Discussion Papers 4819, C.E.P.R. Discussion Papers.
  2. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2001. "Social Interaction and Stock-Market Participation," NBER Working Papers 8358, National Bureau of Economic Research, Inc.
  3. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
  4. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2011. "Recent trends in trading activity and market quality," Journal of Financial Economics, Elsevier, vol. 101(2), pages 243-263, August.
  5. Larry H.P. Lang & Robert H. Litzenberger, . "Trading Volume and Changes in Heterogeneous Expectations," Rodney L. White Center for Financial Research Working Papers 6-89, Wharton School Rodney L. White Center for Financial Research.
  6. Detemple Jerome & Murthy Shashidhar, 1994. "Intertemporal Asset Pricing with Heterogeneous Beliefs," Journal of Economic Theory, Elsevier, vol. 62(2), pages 294-320, April.
  7. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  8. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  9. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  10. Neumark, David & Sharpe, Steven A, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 657-80, May.
  11. Hong, Harrison & Stein, Jeremy, 2007. "Disagreement and the Stock Market," Scholarly Articles 2894690, Harvard University Department of Economics.
  12. Varian, Hal R, 1985. " Divergence of Opinion in Complete Markets: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 309-17, March.
  13. Ng, Man-Chung, 2003. "On the duality between prior beliefs and trading demands," Journal of Economic Theory, Elsevier, vol. 109(1), pages 39-51, March.
  14. Harrison Hong & Jeffrey D. Kubik & Amit Solomon, 2000. "Security Analysts' Career Concerns and Herding of Earnings Forecasts," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 121-144, Spring.
  15. Thanh Huong Dinh & Jean-Fran├žois Gajewski, 2007. "An experimental study of trading volume and divergence of expectations in relation to earnings announcement," CIRANO Working Papers 2007s-24, CIRANO.
  16. Bessembinder, Hendrik & Chan, Kalok & Seguin, Paul J., 1996. "An empirical examination of information, differences of opinion, and trading activity," Journal of Financial Economics, Elsevier, vol. 40(1), pages 105-134, January.
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