The Interrelations Between Investor Beliefs, Information and Market Liquidity
I use two datasets to test the relation between trading volume, the heterogeneity of beliefs and the heterogeneity of belief revisions. The first dataset allows me to construct two groups that proxy for holders and non-holders of a traded asset. This construct allows me to test the relation between changes in trading volume and changes in the dispersion of beliefs both within and across these two groups. I examine changes in within- and across-group dispersion separately and simultaneously. The second dataset allows me to examine belief revisions more closely by analyzing only those prior and posterior beliefs surrounding an information event. I examine the impact of specific belief revision phenomena on trading volume.
My results provide evidence that without regard to specific information events, trading volume is positively related to any change in within-group or across-group dispersion whether this dispersion is measured separately or simultaneously. Second, I provide evidence that this result holds regardless of the specific characteristics of the belief revisions. This result provides further definition to the findings of Kandel and Pearson (1995) and Bamber, Barron and Stober (1999). Finally, my results suggest that extreme belief revisions such that investors with higher valuations subsequently hold lower valuations (flips) have a highly positive and significant relation to changes in market liquidity.
Advisor:Craig Freeman; Robert Newman; Gary Sanger; Ji-Chai Lin; William Lane
School:Louisiana State University in Shreveport
School Location:USA - Louisiana
Source Type:Master's Thesis
Keywords:finance business administration
Date of Publication:11/17/2004