Adjusting the Volume: Essays on Asset Trading Volume

While there is an extensive literature on asset pricing, there is very little theoretical or empirical work that analyzes the trading volume of assets. This paper thus firstly analyzes stock market data from 1947 through 2005, revealing an inverse relationship between changes in trading volume and changes in GDP. This paper examines one potential cause for this relationship: the variation in labor income over the business cycle.;This paper examines an incomplete markets economy, one in which agents cannot write insurance contracts protecting them against changes in future income. The agents face aggregate uncertainty through a dividend (which grants a share of the aggregate endowment) as well as systematic labor income risk (tied to variations in the total endowment). The model is in the class of stochastic dynamic general equilibrium models with incomplete markets (GEI models). Furthermore, the agents are faced with idiosyncratic labor income shocks (through a stochastic sharing rule). Their ability to smooth consumption is limited by borrowing constraints and short-sale constraints. The solution methods employed are from recent literature and produce results that are more robust than similar models.;Simulations of this economy show negative correlations between stock trading and changes to GDP, pointing to the counter-cyclical trading from changes in idiosyncratic income. The results also characterize the portfolio selection of agents and how they use both markets for consumption smoothing. Furthermore, proposals to introduce "Tobin Taxes" are analyzed through the introduction of trading costs. The results show a sharp decrease in the amount of trading in risky assets with an increase in the probability of the agents being borrowing constrained. This points to the potential for a slight decrease in welfare as agents are forced out of the stock market. The frictions in the market also increase the equity premium and decrease price of stocks. Compared to the frictionless market, trading volume falls greatly no matter the size of the friction as agents move to the unencumbered market.