Market Statistics and Technical Analysis: The Role of Volume

We investigate the informational role of volume and its applicability for technical analysis. We develop a new equilibrium model in which aggregate supply is fixed and traders receive signals with differing quality. We show that volume provides information on information quality that cannot be deduc...

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Bibliographic Details
Published in:The Journal of finance (New York) 1994-03, Vol.49 (1), p.153-181
Main Authors: BLUME, LAWRENCE, EASLEY, DAVID, O'HARA, MAUREEN
Format: Article
Language:English
Subjects:
Dealers
Economic models
Economic theory
Endowments
Equilibrium models
Equilibrium prices
Futures
Information
Information economics
Market prices
Modeling
Price changes
Prices
Securities analysis
Securities issues
Securities markets
Statistical data
Supply
Time series
Trade
Trade volume
Volume
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Description
Summary:We investigate the informational role of volume and its applicability for technical analysis. We develop a new equilibrium model in which aggregate supply is fixed and traders receive signals with differing quality. We show that volume provides information on information quality that cannot be deduced from the price statistic. We show how volume, information precision, and price movements relate, and demonstrate how sequences of volume and prices can be informative. We also show that traders who use information contained in market statistics do better than traders who do not. Technical analysis thus arises as a natural component of the agents' learning process.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1994.tb04424.x