Dynamic Trading Volume
36 Pages Posted: 3 Oct 2012 Last revised: 13 Dec 2014
Date Written: October 2, 2012
We derive the process followed by trading volume, in a market with finite depth and constant investment opportunities, where a representative investor, with a long horizon and constant relative risk aversion, trades a safe and a risky asset. Trading volume approximately follows a Gaussian, mean-reverting diffusion, and increases with depth, volatility, and risk aversion. The model generates an endogenous ban on leverage and short-selling.
Keywords: trading volume, long-run, portfolio choice, liquidity
JEL Classification: G11, G12
Suggested Citation: Suggested Citation