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Information, Asset Prices, and the Volume of Trade

Gregory W. Huffman
The Journal of Finance
Vol. 47, No. 4 (Sep., 1992), pp. 1575-1590
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328954
Stable URL: http://www.jstor.org/stable/2328954
Page Count: 16
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Information, Asset Prices, and the Volume of Trade
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Abstract

A dynamic equilibrium model is constructed in which agents with access to different information sets participate in the capital market. Agents must use the equilibrium price of capital to make optimal forecasts of the return to holding capital. Examples show that the volume of trade, as well as the price of capital, can be highly correlated with a measure of the information content of prices. This measure of information is the difference between the unconditional entropy of the dividend and the entropy of the dividend conditional on observing the price of capital.

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