Yesterday, I wrote about how investors tend to invest in overvalued assets when they think other investors are optimistic about these assets. They are effectively trying to ride a wave of optimism even though they know this wave may not be grounded in fundamentals. The problem with this is that one has to be constantly on the lookout for signs the wave of optimism is breaking and then sell as quickly as possible. Hence, if investors tend to ride such a wave of optimism, one expects trading volume to increase as well as asset prices increase.
Can you please better explain these two passages from your article:
"The increase in trading volume following higher returns is not driven by a reduction in trading volume after poor returns. Rather, it is an almost entirely one-sided effect where trading volume increases after a period of higher returns but does not drop after a period of low returns. [...] they are sitting on a shorter fuse to get rid of the investment, particularly if they are uncertain the rally will continue. And that means in the end, that not only are there cynical bubbles in markets but there is also cynical liquidity."
Does it mean that the volume is sustained by a cynical bubble in the same way as it is sustained by the exit of retailers who dump down their stocks, and vice versa?
Can you please better explain these two passages from your article:
"The increase in trading volume following higher returns is not driven by a reduction in trading volume after poor returns. Rather, it is an almost entirely one-sided effect where trading volume increases after a period of higher returns but does not drop after a period of low returns. [...] they are sitting on a shorter fuse to get rid of the investment, particularly if they are uncertain the rally will continue. And that means in the end, that not only are there cynical bubbles in markets but there is also cynical liquidity."
Does it mean that the volume is sustained by a cynical bubble in the same way as it is sustained by the exit of retailers who dump down their stocks, and vice versa?
Hi Gianni
Yes, that is correct. And in fact, I think (but I can't prove) that it is mostly retailers who create this cynical liquidity.
Thank you very much.