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

IMF Working Paper No. 94/126

36 Pages Posted: 15 Feb 2006

See all articles by Charles Kramer

Charles Kramer

International Monetary Fund (IMF) - Capital Markets and Financial Studies Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: October 1994

Abstract

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.

JEL Classification: G12, G14

Suggested Citation

Kramer, Charles F., Noise Trading, Transaction Costs, and the Relationship of Stock Returns and Trading Volume (October 1994). IMF Working Paper No. 94/126, Available at SSRN: https://ssrn.com/abstract=883869

Charles F. Kramer (Contact Author)

International Monetary Fund (IMF) - Capital Markets and Financial Studies Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6348 (Phone)
202-623-6339 (Fax)

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