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. I examine 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. I show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns. I.

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This paper analyzes the ability of trading activity to explain cross-sectional variation in expected stock returns. We depart from the previous literature in not taking for granted that turnover is solely a proxy for liquidity. Instead, we test the impact of trading activity on monthly stock returns, after controlling for the usual factors (firm size, book-to-market-ratio and momentum) and for illiquidity costs. We estimate illiquidity costs (price impact of a trade) using intraday data from 1993 to 2002 for a large sample of NYSE and Nasdaq stocks. The results for the entire sample period provide evidence that higher turnover rates are associated with lower future returns after controlling for these costs. We also find evidence that the effect of illiquidity costs is related to firm size. Yet, for large and glamour stocks, which are very liquid, the effect of trading activity is still statistically and economically significant. During the dot-com period of 1998-2000, we observe that the turnover e¤ect is highly volatile across months and it is not signi…cantly negative. These findings call into question the presumption that trading activity is solely a proxy for liquidity.

In rational beliefs (RB) models there is an observed empirical distribution for the stochastic process of state variables. Many different weakly asymptotic mean stationary (WAMS) processes could have generated this empirical distribution, i.e. are consistent with it, and each of them are therefore called a rational belief. We provide a general framework for using RB in general equilibrium models. Individual rational beliefs are assumed correlated by means of sunspots which at the aggregate level lead to excess volatility. The application adapts the proof by Duffie et al (1994) of the existence of a stationary ergodic RE equilibrium to the case where agents hold rational beliefs.

We examine a sample of 222 firms that stopped providing quarterly earning guidance after doing so routinely. Some firms announced the stopping decision publicly while the majority did not. Our findings indicate that poor earnings—past and expected, a spotty record of meeting/beating analyst forecasts, managerial change, low frequency of guidance in the stopper’s industry, and past and anticipated difficulty in predicting earnings are the major reasons for stopping guidance. For the consequences of guidance cessation, we find that analyst following decreases while analyst forecast dispersion and forecast error increase after guidance cessation. Contrary to frequent claims by managers and commentators, we find that guidance stoppers, allegedly free of the market myopia shackles to focus on the long-term, do not increase capital investments and R&D after stopping guidance. Our findings also do not support the frequent claims that guidance stoppers increase alternative forms of forwardlooking disclosure. Finally, we observe that 31 % of guidance stoppers apparently could not buck the trend and resumed quarterly guidance after a typical quiet period of six quarters. Overall, our findings are not consistent with the widely claimed benefits from guidance

Abstract: This paper extends Harrison and Kreps ’ model (1978) theoretically by relaxing the assumption of no short sales and explores empirically the effect of investors’ awareness of heterogeneity in expectations on movements of stock prices. Even when short sales are allowed, individual investors ’ willingness to pay reflects not only the present value of future dividends, but also expected future gains from resale. In addition, in order to gain from resale, investors are concerned about the distribution of other investors ’ willingness to pay. As a result, changes in the standard deviation as well as the mean of investors ’ willingness to pay will affect the movements of stock prices. The empirical section of this paper contains regression results in which the coefficients for the current and expected future standard deviations are significantly positive. Further, a Wald test does not reject the hypothesis that the coefficients for the current and expected future standard deviations are equal, as predicted by the model. Finally, the implied fraction of stockholders among all potential investors, as derived from the regression coefficients, appears to be consistent with the results in a recent survey conducted by the Federal

Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors (number of trades, turnover). Approximately 3000 online broker investors were asked to answer an internet questionnaire which was designed to measure various facets of overconfidence (miscalibration, the better than average effect, illusion of control, unrealistic optimism). The measures of trading volume were calculated by the trades of 215 individual investors who answered the questionnaire. We find that investors who think that they are above average in terms of investment skills or past performance trade more. Measures of miscalibration are, contrary to theory, unrelated to measures of trading volume. This result is striking as theoretical models that incorporate overconfident investors mainly motivate this assumption by the calibration literature and model overconfidence as underestimation of the variance of signals. The results hold even when we control for several other determinants of trading volume in a cross-sectional regression analysis. In connection with other recent findings, we conclude that the usual way of motivating and modelling overconfidence which is mainly based on the calibration literature has to be treated with caution. We

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This paper examines implications from boundedly rational agents models, by investigating the relation between returns following earnings announcements (post-earnings announcement drift) and divergence of opinions among investors. We proxy for divergent opinions with the quantity of volume at the earnings date that is unexpected. Post-announcement returns are increasing in unexpected volume. Our evidence is consistent with Varian (1985) who suggests that opinion divergence may be treated as an additional risk factor affecting asset prices.

We study the impact of sterilized Central Bank interventions on the microstructure of currency markets. We analyze their major channels of effectiveness, imperfect substitutability and signaling, in a model of sequential trading in which the stylized monetary authority is a rational, but not necessarily profit-maximizing player. In such a setting, and consistent with available empirical evidence, we find that intervention has endogenous long-lived effectsonquoteswhen informative about policy objectives and fundamentals, or when the threat of future actions by the Central Bank is significant and credible, for these circumstances lead uninformed investors or dealers to a permanent revision in their beliefs. Portfolio balance effects of such transactions are instead short-lived, because of trading occurring sequentially and not because of high asset substitutability, as often argued in the literature. We also find that a monetary authority attempting to lean against the wind or to chase the trend of the domestic currency is generally more successful when dealers compete against each other for the incoming trades. Intuitively, competition induces the dealers to pass all revenues or losses they expect from trading with the Central Bank onto the population of investors. This is accomplished by greater, and generally