Asset price volatility and trading volume with rational beliefs

Ho-Mou Wu () and Wen-Chung Guo

Economic Theory, 2004, vol. 23, issue 4, 795-829

Abstract: This paper develops a model of speculative trading in a large economy with a continuum of investors. In our model the investors are assumed to have diverse beliefs which are rational in the sense of being compatible with observed data. We demonstrate the existence of price amplification effects and show that the equilibrium prices can be higher or lower than the rational expectation equilibrium price. It is also shown that trading volume is positively related to the directions of price changes. Moreover, we study how asset price volatility and trading volume are influenced by belief structures, short selling constraints and the amount of fund available for investment. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Price volatility; Trading volume; Speculation; Rational beliefs. (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (24)

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DOI: 10.1007/s00199-003-0397-9

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