Disagreement and Learning: Dynamic Patterns of Trade

49 Pages Posted: 23 Mar 2005 Last revised: 6 Aug 2009

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Ilan Kremer

Independent

Date Written: August 4, 2009

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.

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

JEL Classification: D8, G1

Suggested Citation

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

Snehal Banerjee (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Ilan Kremer

Independent

No Address Available

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