Noise Trading, Transaction Costs, and the Relationship of Stock Returns and Trading Volume
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:
Asset prices Consumption Estimation techniques Return on investment Stocks
English
Publication Date:
October 1, 1994
ISBN/ISSN:
9781451854879/1018-5941
Stock No:
WPIEA1261994
Pages:
36
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