The purpose of this paper is to propose a new theory regarding the heterogeneity of trading information and price-volume relationship. Basically, the heterogeneity of trading information influences the market demand and supply curves of a stock (or equity index), which in turn affects the price–volume relationship for that stock (or index). This theoretical framework helps resolve existing issues regarding price–volume relationships for equities. For example, empirical experience demonstrates that stock price reversals from tops or rebounds from bottoms are often accompanied with extremely large trading volume; however, an abnormal large volume is not always, but more likely, to lead a price reversal (or rebound). This is due to the greatest extent of heterogeneity of trading information among traders at the time of price reversals (or rebounds). Empirically, this investigation focuses on the price–volume relationship surrounding stock price reversals (or rebounds), which clarify the role of information. The results strongly support the proposed framework.
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