The more we know , the less we agree ∗

Stylized facts on the increased trading volume around public announcements in various financial markets give the impression that public information releases increase disagreement among traders. However, it is widespread opinion in the economic literature that under Bayesian updating and common priors, public information cannot cause divergence of opinion. We show that this is true only under specific circumstances. In this paper we will argue that in a standard rational expectation model — where some traders has to liquidate before others, there are new entrants and the information sets of early traders and new entrants are not too strongly connected —, public announcements increase disagreement among traders, which generates large trading volume. The result is closely related to the effect of higher-order expectations on trading activity.