The impact of heterogeneous beliefs on trading volume

This paper analyzes the effects that uncertainty about economic fundamentalshas on aggregate trading volume. First, the trading volume of an investor facinga standard consumption portfolio choice problem is derived. It is found that if theparameters describing the investment opportunity set follow diffusion processes,the trading volume also follows under general conditions a diffusion process.We then analyze a pure exchange economy of the type studied by Detemple andMurthy (1994) and Basak (2000) where the growth rate of aggregate consumptionis unobservable and investors have differing beliefs on its dynamics. It is foundthat disagreement on the mean growth rate increases expected trading volume.This effect of the disagreement is stronger when investors also have differentbeliefs on the variance of the growth rate.