Informed Speculation About Trading Flows: Price Variability and Trading Volume

Many asset markets are composed of three types of participants: professional investors who possess superior skills or knowledge, uninformed private investors, and liquidity investors. In this paper, we analyze the properties of asset price and trading volume when professional investors are able to forecast future trading flows or the trading positions of liquidity traders. Private investors, on the other hand, can only observe the price and make their investment choices accordingly. In a rational expectations model based on Grossman and Stiglitz (1980), the interactions among these three types of investors lead to a set of clear comparative statics that match the results in the empirical asset pricing literature. There are also additional results that can be tested using asset market data.