Asset Price Volatility and Trading Volume with Rational Beliefs

Download or read book Asset Price Volatility and Trading Volume with Rational Beliefs written by Ho-Mou Wu and published by . This book was released on 2008 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a model of speculative trading in a large economy with a continuum of investors. In our model the investors are assumed to have diverse beliefs which are rational in the sense of being compatible with observed data.We demonstrate the existence of price amplification effects and show that the equilibrium prices can be higher or lower than the rational expectation equilibrium price. It is also shown that trading volume is positively related to the directions of price changes. Moreover, we study how asset price volatility and trading volume are influenced by belief structures, short selling constraints and the amount of fund available for investment.