Board of Governors of the Federal Reserve System

September 2011

Belief Dispersion among Household Investors and Stock Trading Volume

Dan Li and Geng Li

Abstract:

We study the effects of belief dispersion on stock trading volume. Unlike most of the existing work on the subject, our paper focuses on how household investors' disagreements on macroeconomic variables influence market-wide trading volume. We show that greater belief dispersion among household investors is associated with significantly higher trading volume, even after controlling for the disagreements among professional forecasters. Further, we find that the belief dispersion among household investors who are more likely to own stocks has more pronounced effects on trading volume, suggesting a causal relationship. Finally, we show that greater "belief jumbling," or the dispersion of belief changes over a given period, is also related to more active trading during the same period.

Keywords: Belief dispersion, trading volume, household investors, Surveys of Consumers

PDF: Full Paper