Noise Trading, Transaction Costs, and the Relationship of Stock Returns and Trading Volume
October 1, 1994
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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.
Subject: Asset prices, Consumption, Estimation techniques, Return on investment, Stocks
Keywords: expected return, market maker, risk premium, time series, WP
Pages:
36
Volume:
1994
DOI:
Issue:
126
Series:
Working Paper No. 1994/126
Stock No:
WPIEA1261994
ISBN:
9781451854879
ISSN:
1018-5941
