How Much Trading Volume is Too Much?
18 Pages Posted: 12 Jan 2017
Date Written: November 9, 2016
Is there excessive trading volume in financial markets? Recent proposals to tax transactions, limit short selling, or restrict clienteles for particular financial products reflect such a view but beg the fundamental question of how much trading is optimal for an economy. We show that the optimal level of volume done purely for risk-sharing cannot be determined from the real economy alone, dictating that there is no natural bound on trading volume. We analyze how a variety of restrictions on trading influence welfare. Our results provide an economic basis for evaluating the desirability of policy proposals to limit trading activity.
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