Abstract:

I show that market participants' equilibrium beliefs can create fluctuations in the volume of trading, even in a stationary environment. I study a sequential search model where buyers face an unknown distribution of offers.

Each buyer learns about the distribution by observing whether a randomly chosen buyer traded yesterday. A cyclical equilibrium exists where the informational content of observing a trade fluctuates, which leads to fluctuations in the volume of trading. The cyclical equilibrium is more e fficient than steady-state equilibria. The effi ciency result holds also if buyers get a signal about past transaction prices or past trading volumes.