Trading Volume and Public Information in an Experimental Asset Market with Short-Horizon Traders

Abstract

We examine the joint impact of investors’ trading horizons and public information on trading volume. We hypothesize that public information leads to relative homogenization in the traders’ beliefs about the fundamental value of an asset and this reduces their disagreement regarding the fundamental value. Since the long-horizon traders’ trade is motivated by the fundamental value, such reduced disagreement leads to a reduction in trading volume. We further hypothesize that public information leads to polarization in the traders’ beliefs about other traders’ beliefs about the fundamental value and this polarization increases disagreement regarding other traders’ beliefs about the fundamental value. Since short-horizon traders’ trade is motivated by other traders’ beliefs about the fundamental value, such increased disagreement leads to an increase in trading volume. We test these hypotheses in an experimental asset market and find strong evidence in their support.