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.