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Disagreement and Learning: Dynamic Patterns of Trade


Snehal Banerjee


Kellogg School of Management - Department of Finance

Ilan Kremer


Independent

August 4, 2009

Journal of Finance forthcoming

Abstract:     
The empirical evidence on investor disagreement and trading volume is difficult to reconcile in standard rational expectations models. We develop a dynamic model in which investors disagree about the interpretations of public information. We obtain a closed-form linear equilibrium that allows us to study what restrictions on the disagreement process yield empirically observed volume and return dynamics. We show that when investors have infrequent but major disagreements, there is positive autocorrelation in volume and positive correlation between volume and price volatility. We also derive novel empirical predictions that relate the degree and frequency of disagreement to volume and volatility dynamics.

Number of Pages in PDF File: 49

Keywords: Difference of opinions, autocorrelation in volume, correlation in price changes and volume

JEL Classification: D8, G1

working papers series





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Date posted: March 23, 2005 ; Last revised: August 6, 2009

Suggested Citation

Banerjee, Snehal and Kremer, Ilan, Disagreement and Learning: Dynamic Patterns of Trade (August 4, 2009). Journal of Finance forthcoming. Available at SSRN: http://ssrn.com/abstract=687268 or http://dx.doi.org/10.2139/ssrn.687268

Contact Information

Snehal Banerjee (Contact Author)
Kellogg School of Management - Department of Finance ( email )
Evanston, IL 60208
United States
Ilan Kremer
Independent
No Address Available
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