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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. Copyright (c) 2009 the American Finance Association.

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
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    Cited by:

    1. Gebka, Bartosz & Wohar, Mark E., 2013. "Causality between trading volume and returns: Evidence from quantile regressions," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 144-159.
    2. Emiliano Pagnotta, 2016. "Chasing Private Information," 2016 Meeting Papers 1673, Society for Economic Dynamics.
    3. Bartosz Gębka, 2012. "The Dynamic Relation Between Returns, Trading Volume, And Volatility: Lessons From Spillovers Between Asia And The United States," Bulletin of Economic Research, Wiley Blackwell, vol. 64(1), pages 65-90, January.
    4. repec:eee:jetheo:v:172:y:2017:i:c:p:512-557 is not listed on IDEAS
    5. Ganguli, Jayant & Condie, Scott, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 5631, University of Essex, Department of Economics.
    6. Elina Pradkhan, 2016. "Information Content of Trading Activity in Precious Metals Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(5), pages 421-456, May.

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