Trading Volume in Dealer Markets

Katya Malinova and Andreas Park

Journal of Financial and Quantitative Analysis, 2010, vol. 45, issue 6, 1447-1484

Abstract: We develop a financial market trading model in the tradition of Glosten and Milgrom (1985) that allows us to incorporate nontrivial volume. We observe that in this model price volatility is positively related to the trading volume and to the absolute value of the net order flow (i.e., the order imbalance). Moreover, higher volume leads to higher order imbalances. These findings are consistent with well-established empirical findings. Our model further predicts that higher trader participation and systematic improvements in the quality of traders’ information lead to higher volume, larger order imbalances, lower market depth, shorter duration, and higher price volatility.

Date: 2010
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Working Paper: Trading Volume in Dealer Markets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:45:y:2011:i:06:p:1447-1484_00

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