Differences of Opinion and the Price Volume Relation

52 Pages Posted: 2 Apr 2009 Last revised: 20 Dec 2010

Date Written: December 9, 2010


This paper solves a dynamic general equilibrium asset pricing model of disagreement that draws a direct link between asset prices and the financial volume of trade. The model exhibits two risk averse agents that hold heterogeneous beliefs about the conditional mean of the aggregate consumption growth. The differences in opinions is supported by the fact that agents interpret public information differently. The connecting link between prices and volume is an exogenously time varying disagreement intensity that determines the magnitude of disagreement about new information. The model is able to explain a number of seemingly unrelated asset pricing facts namely the positive correlation between price changes and volume, the contemporaneous relation between volume and return volatility, the excess volatility, the volatility persistence and the negative correlation between price levels and volatility.

Keywords: Heterogeneous beliefs, general equilibrium, trading volume.

JEL Classification: G12

Suggested Citation

Xiouros, Costas, Differences of Opinion and the Price Volume Relation (December 9, 2010). Available at SSRN: https://ssrn.com/abstract=1365096 or http://dx.doi.org/10.2139/ssrn.1365096

Costas Xiouros (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442

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