Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253466 
Year of Publication: 
2020
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 15 [Issue:] 4 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2020 [Pages:] 1365-1398
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
This study provides an explanation for the emergence of power laws in asset trading volume and returns. We consider a two-state model with binary actions, where traders infer other traders' private signals regarding the value of an asset from their actions and adjust their own behavior accordingly. We prove that this leads to power laws for equilibrium volume and returns whenever the number of traders is large and the signals for asset value are sufficiently noisy. We also provide numerical results showing that the model reproduces observed distributions of daily stock volume and returns.
Subjects: 
Herd behavior
trading volume
stock returns
fat tail
power law
JEL: 
G14
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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