Working Paper: CEPR ID: DP8455
Authors: Pter Kondor
Abstract: I allow heterogenity in trading horizons across groups in a standard differential information model of a financial market. This can explain the empirical facts that after public announcements trading volume increases, more private information is incorporated into prices and volatility increases. Public information, in such environments, has the important secondary role of helping agents to learn about the information of other agents. As a consequence, whenever the correlation between private information across groups is sufficiently low, a public announcement increases disagreement among short horizon traders on the expected selling price, even if it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested.
Keywords: Higher-order expectations; Public announcement; Trading volume
JEL Codes: D82; D84; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public announcements (E60) | Increase in trading volume (F10) |
| Public announcements (E60) | Increase in price volatility (G13) |
| Low correlation of private information (D89) | Public announcements increase disagreement among short-horizon traders (G14) |
| Presence of short-horizon traders (G19) | Enhanced responsiveness of trading volume to public announcements (G14) |
| Increased market segmentation (D49) | Amplified effects of public announcements on trading activity (G14) |
| Increased market segmentation (D49) | Amplified effects of public announcements on price volatility (G14) |