Abstract: This paper shows how to infer information about any random variable
from trading volume, assuming that the random variable and the
traders' demands are symmetrically (and then normally) distributed
around zero. The volumebased conditional expectation of such a random
variable is zero, while the covariance between its absolute value and
volume is positive if the variable is jointly normally distributed
with the traders' demands. In that case, numerical examples indicate
that the volumebased conditional probability of extreme asset value
realizations (positive or negative) increases with volume. These
results, developed in a marketclearing framework, apply also to
marketmaking frameworks. Finally, the paper develops a simple model
where transaction costs can generate a positive covariance between
price and trading volume.
Keywords: Information, trading volume
Full paper (332 KB PDF)
 Full paper (367 KB Postscript)
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Last update: July 16, 1997
