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

October 1, 1994

Preview Citation

Format: Chicago

Charles Frederick Kramer. Noise Trading, Transaction Costs, and the Relationship of Stock Returns and Trading Volume, (USA: International Monetary Fund, 1994) accessed November 21, 2024

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.

Subject: Asset prices, Consumption, Estimation techniques, Return on investment, Stocks

Keywords: Expected return, Market maker, Risk premium, Time series, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1994/126
Stock No:

WPIEA1261994
ISBN:

9781451854879
ISSN:

1018-5941

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