Does Trading Volume Mitigate or Amplify Mispricing?

We find that when volume is relatively low, trading volume is primarily driven by attention rather than disagreement. An increase in volume, reflecting heightened attention, can mitigate mispricing stemming from limited attention. In contrast, when volume is relatively high, we find a stronger correlation between volume and disagreement than attention. Here, an increase in volume, suggesting heightened disagreement, may enhance investor bias, thereby amplifying mispricing driven by such bias. Overall, whether trading volume amplifies or mitigates mispricing depends on both the volume state (high or low) and the source of mispricing, whether due to limited attention or investor bias