Fundamental volatility and informative trading volume in a rational expectations equilibrium

Dan Luo and Yipeng Mao

Economic Modelling, 2021, vol. 105, issue C

Abstract: This paper presents a tractable model of asset price with informative trading volume. Investors condition demands on their rational expectations of both the equilibrium price and trading volume. We suggest a new information role of trading volume, which enables the investors to extract continuous information regarding the liquidation value volatility of the risky asset. The liquidation value volatility determines the relative importance of fundamental value and noise trading in the price function. It also monotonically increases the price volatility. We provide an explanation of the negative and nonlinear relationship between price volatility and trading volume. We also examine the effects of information accuracy and investor composition on the equilibrium price distribution and trading volume.

Keywords: Fundamental volatility; Trading volume; Rational expectations equilibrium; Price distribution; Information accuracy (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:105:y:2021:i:c:s0264999321002522

DOI: 10.1016/j.econmod.2021.105663

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