Abstract
We propose a dynamic equilibrium model with stochastic interest rates in which agents hold heterogeneous valuations for the same asset and take on positions against each other. The model shows that interest rate uncertainty and investor heterogeneity are key determinants of price dispersion. Higher search intensity reduces price dispersion, while raising volume, leading to a negative volatility-volume relation. The sensitivity of volatility to volume is high when liquidity is low, interest rate variations are high and investors' valuations are more heterogeneous. Evidence supports our model's predictions and shows that search frictions play an important role in driving the volatility-volume relation.
| Original language | English |
|---|---|
| Pages (from-to) | 523–578 |
| Number of pages | 56 |
| Journal | Review of Asset Pricing Studies |
| Volume | 13 |
| Issue number | 3 |
| Online published | 27 Feb 2023 |
| DOIs | |
| Publication status | Published - Sept 2023 |
Bibliographical note
Full text of this publication does not contain sufficient affiliation information. With consent from the author(s) concerned, the Research Unit(s) information for this record is based on the existing academic department affiliation of the author(s).Research Keywords
- G12
- G13
- US TREASURY MARKET
- TRADING VOLUME
- RETURN VOLATILITY
- PRICE DISCOVERY
- INFORMATION-CONTENT
- ECONOMIC-NEWS
- ASSET MARKETS
- LIQUIDITY
- BOND
- COSTS