Trading Volume and Transaction Costs in Specialist Markets

Posted: 9 Mar 2008

See all articles by Thomas J. George

Thomas J. George

University of Houston - Department of Finance

Gautam Kaul

University of Michigan, Stephen M. Ross School of Business

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

Abstract

Prior work with competitive rational expectations equilibrium models indicates that there should be a positive relation between trading volume and differences in beliefs or information among traders. We show that this result is sensitive to whether and how transaction costs are modeled. In a specialist market with endogenous transaction costs we show that trading volume can be negatively related to the degree of informational asymmetry in the market. Our analysis highlights the dependence of volume on market structure, and our results suggest that the "volume effects" of corporate or macroeconomic events reflect a decrease, rather than an increase, in heterogeneity of beliefs or asymmetry of information.

Suggested Citation

George, Thomas J. and Kaul, Gautam and Nimalendran, Mahendrarajah, Trading Volume and Transaction Costs in Specialist Markets. Journal of Finance, Vol. 49, No. 4, pp. 1489-1505, September 1994. Available at SSRN: https://ssrn.com/abstract=1104484

Thomas J. George (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Gautam Kaul

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-764-9594 (Phone)
734-647-6861 (Fax)

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9526 (Phone)
352-392-0301 (Fax)

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