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Journal of Finance Vol. 49 No. 4 1994

Trading Volume and Transaction Costs in Specialist Markets

Thomas J. George; Gautam Kaul; Mahendrarajah Nimalendran1

1 George is from the Ohio State University, Kaui is from the University of Michigan, and Nimalendran is from the University of Florida. We thank Steve Buser (the editor), Margaret Forster, Carol Frost, Francis Longstaff, René Stulz, Ralph Walkling, and three anonymous referees for comments that impro

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.

DOI
10.1111/j.1540-6261.1994.tb02463.x
Volume
49
Issue
4
Pages
1489-1505
Language
en
Sources
openalex crossref

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