How Much Trading Volume is Too Much?

18 Pages Posted: 12 Jan 2017

See all articles by David Easley

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: November 9, 2016

Abstract

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.

Suggested Citation

Easley, David and O'Hara, Maureen, How Much Trading Volume is Too Much? (November 9, 2016). Available at SSRN: https://ssrn.com/abstract=2896806 or http://dx.doi.org/10.2139/ssrn.2896806

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Cornell University - Department of Information Science ( email )

402 Bill & Melinda Gates Hall
Ithaca, NY 14853
United States

Maureen O'Hara (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

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