A Model of Price, Volume, and Sequential Information

Abstract

This paper models the relationship between price and volume by tracking their adjustment path and speed in a world with heterogeneous investors. Motivated by widely observed information leakage in the stock market and fast-growing electronic_x000D_ communication networks, the model features sequential information and direct order matching. I show that both the content and the dissemination speed of information are incorporated in price changes and volume accumulations simultaneously. A convergence_x000D_ trading strategy is proposed based on a joint statistic of price and volume, which should_x000D_ help to improve the timing of market entry and exit. The model offers an explanation for the_x000D_ mixed evidence on the relationship between price change and volume and provides several testable hypotheses.