A Rational Expectations Equilibrium with Informative Trading Volume

JAN SCHNEIDER

doi:10.1111/j.1540-6261.2009.01517.x

Journal of Finance Vol. 64 No. 6 2009

A Rational Expectations Equilibrium with Informative Trading Volume

JAN SCHNEIDER^{1,2,3,4,5,6,7,8,9,10}

¹ University of Notre Dame · ² University of British Columbia · ³ University of Alberta · ⁴ University of California, Los Angeles · ⁵ University of Toronto · ⁶ Fisher College · ⁷ Rusk Rehabilitation · ⁸ McGill University · ⁹ Indiana University · ¹⁰ The University of Texas at Austin

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.

DOI: 10.1111/j.1540-6261.2009.01517.x
Volume: 64
Issue: 6
Pages: 2783-2805
Language: en
Sources: crossref openalex

A Rational Expectations Equilibrium with Informative Trading Volume

Abstract

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