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Rev Fin 1993; 6:405-434
© 1993 the Society for Financial Studies

Article

Volume, volatility, and the dispersion of beliefs

CT Shalen
Research Department, Chicago Mercantile Exchange, 30 South Wacker Drive, Chicago, IL 60606, USA

Abstract

I examine a two-period noisy rational expectations model of a futures market and show that the dispersion of expectations about a weighted average of future prices measures both the additional volatility and the additional expected volume of trade associated with noisy information. The role played by dispersion helps clarify several stylized facts concerning volume and price behavior. Specifically, dispersion can be a factor contributing to the positive correlation between volume and absolute price changes, and the positive correlation between consecutive absolute price changes.


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