Differential interpretations and trading volume

Linda Smith Bamber, Orie Edwin Barron, Thomas L. Stober

Research output: Contribution to journalArticle

93 Citations (Scopus)

Abstract

This study provides evidence that differential interpretations are an important stimulus for speculative trading. We measure differential interpretations using data on analysts' revisions of forecasts of annual earnings after the announcement of quarterly earnings that are components of those annual earnings numbers. We find two conditions under which differential interpretations play a significant role in explaining trading. First, we present empirical evidence supporting Kandel and Pearson's (1995) argument that trading coincident with small price changes reflects investors' differential interpretations of information. This evidence is important because it is inconsistent with conventional models of trade that assume homogeneous interpretations. Second, we also find that differential interpretations explain a significant amount of the trading occurring in a sample where trading volume is higher than the (firm-specific) non-announcement period average. This result is consistent with informed traders acting on their differential interpretations when there is enough liquidity trading to help camouflage their own information-based trades. In sum, the study's results confirm Bachelier's (1900) intuition that differential interpretations are an important stimulus for trading.

Original languageEnglish (US)
Pages (from-to)369-386
Number of pages18
JournalJournal of Financial and Quantitative Analysis
Volume34
Issue number3
DOIs
StatePublished - Jan 1 1999

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Trading volume
Analysts
Intuition
Liquidity
Camouflage
Price changes
Empirical evidence
Informed traders
Announcement
Investors

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Bamber, Linda Smith ; Barron, Orie Edwin ; Stober, Thomas L. / Differential interpretations and trading volume. In: Journal of Financial and Quantitative Analysis. 1999 ; Vol. 34, No. 3. pp. 369-386.
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Differential interpretations and trading volume. / Bamber, Linda Smith; Barron, Orie Edwin; Stober, Thomas L.

In: Journal of Financial and Quantitative Analysis, Vol. 34, No. 3, 01.01.1999, p. 369-386.

Research output: Contribution to journalArticle

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