Trading and Asset Prices

64 Pages Posted: 3 Sep 2016 Last revised: 21 Aug 2017

Date Written: April 12, 2017

Abstract

A model is presented with counter-cyclical belief heterogeneity and habit-formation preferences. Belief heterogeneity stems from disagreement in the interpretation of common signals. The model accounts for the positive relation between the magnitude of returns and trading volume, the asymmetric relation between returns and volume, the equity premium and the stock return volatility. If agents are able to create leverage without borrowing, using instead a levered security, the model also accounts for the positive relation between returns and volume. Further, the endogenous belief heterogeneity is negatively correlated with the price-dividend ratio and predicts interest rates; new empirical evidence supports both predictions.

Keywords: Trading Volume, Asset Prices, Heterogeneous Beliefs, External Habit-Formation Preferences.

JEL Classification: G10, G12.

Suggested Citation

Xiouros, Costas, Trading and Asset Prices (April 12, 2017). Available at SSRN: https://ssrn.com/abstract=2833783 or http://dx.doi.org/10.2139/ssrn.2833783

Costas Xiouros (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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