Differential Interpretation of Public Signals and Trade in Speculative Markets

Most models of trade in speculative markets assume that agents interpret public information identically. The authors provide empirical evidence on the relation between the volume of trade and stock returns around public announcements, and they argue that the evidence is inconsistent with this assumption. They then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume-return relation. Then the authors test the standard model of belief revision underlying most models of trade using stock brokerage research analysts' earnings forecasts. The hypothesis of identical interpretations seems inconsistent with the forecast revisions in these data.