Noise Trading, Transaction Costs, and the Relationship of Stock Returns and Trading Volume

Author/Editor:

Charles Frederick Kramer

Publication Date:

October 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The relationship of stock returns and trading volume is the focus of much recent interest. I examine an economic model of a rational trader who operates in a market with transactions costs and noise trading. The level of trading affects the rational trader’s marginal cost of transacting; as a result, trading volume is a source of risk. This engenders an equilibrium relationship between returns and volume. The model also provides a simple way to scrutinize this relationship empirically. Empirical evidence supports the implications of the model.

Series:

Working Paper No. 1994/126

Subject:

English

Publication Date:

October 1, 1994

ISBN/ISSN:

9781451854879/1018-5941

Stock No:

WPIEA1261994

Pages:

36

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