Market Statistics and Technical Analysis: The Role of Volume





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    • Blume and Easley are from the Department of Economics, Cornell University and O'Hara is from the Johnson Graduate School of Management, Cornell University. We would like to thank David Brown, Sanjeev Goyal, Matt Spiegel and seminar participants at Cornell, Duke, Harvard, Rutgers, the Stockholm School of Economics, Vanderbilt, the Western Finance Association meetings, the European Finance Association meetings, and the Winter Finance Research Conference for helpful comments. We also appreciate the helpful comments of an anonymous referee and the editor, René Stulz.


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.