The fundamental determinants of trading volume reaction to financial information: evidence and implications for empirical capital market research

The fundamental determinants of trading volume reaction to financial information: evidence and implications for empirical capital market research

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Article ID: iaor201112333
Volume: 34
Issue: 1
Start Page Number: 61
End Page Number: 101
Publication Date: Mar 2011
Journal: Journal of Financial Research
Authors: , , ,
Keywords: stock market
Abstract:

Prior empirical research indicates that trading volume reaction to new information increases with the heterogeneity of investors’ prior beliefs. We examine three potential factors that theoretical models of financial economists show determine trading volume reaction to new information: heterogeneous prior beliefs, differential interpretation, and the consensus effect–the extent to which the information causes their beliefs to converge or diverge. We find that these three factors have a distinct and significant incremental effect on trading volume, thereby suggesting that empirical trading volume models that exclude or fail to control for any of these determinants are misspecified with biased estimated coefficients.

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