A Model of Competitive Stock Trading Volume

Abstract

A model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives. The author examines the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics. It is found that volume is positively correlated with absolute changes in prices and dividends. The author shows that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns. Copyright 1994 by University of Chicago Press.