Noise Trading, Transaction Costs, and the Relationship of Stock Returns and Trading Volume [electronic resource] / Charles Frederick Kramer.
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TextSeries: IMF Working Papers; Working Paper ; No. 94/126Publication details: Washington, D.C. : International Monetary Fund, 1994Description: 1 online resource (36 p.)ISBN: 1451854870 :ISSN: 1018-5941Subject(s): Equation | Explanatory Power | Orthogonality | Statistics | Transactions Costs | United StatesAdditional physical formats: Print Version:: Noise Trading, Transaction Costs, and the Relationship of Stock Returns and Trading VolumeOnline resources: IMF e-Library | IMF Book Store Abstract: 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.
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.
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