Finance and Economics Discussion Series (FEDS)
September 1997
Trading Volume and Information Distribution in a Market-Clearing Framework
Dominique Y. Dupont
Abstract:
This paper investigates the relations between aggregate trading volume and information on financial markets from a theoretical standpoint. Through numerical examples, it relates some statistics describing equilibrium price and volume{such as the variance of the price and its correlation with the true asset value, the volume mean, variance, skewness, and kurtosis{to the distribution of information across traders. The analysis is carried out in a static noisy rational expectations framework, with multiple informed traders, where both the precision and the correlation of the signals observed by the traders can be modified.
Numerical examples show that the variance of the market-clearing price, and the mean and variance of the volume are increasing in the precision of the informed trader's signals and{to a lesser extent{in the liquidity shock variance. The price informativeness is increasing in the precision of the informed traders' signals and decreasing in the liquidity shock variance. Skewness and kurtosis in the trading volume distribution are not always associated with a high precision of the informed trader' signals; the relation depends on the correlation across the informed traders' signals.
Full paper (2184 KB Postscript)Keywords: Trading volume, information
PDF: Full Paper
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