Asset Trading Volume with Dynamically Complete Markets and Heterogeneous Agents

Authors

  • Kenneth L. Judd,

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    • Judd is at the Hoover Institution, Kubler is at Stanford University, and Schmedders is at Northwestern University. We are grateful to Larry Jones, Mordecai Kurz, Michael Magill, Tom Sargent, and seminar participants at Carnegie Mellon University and the Hoover Institution for helpful comments. We also thank two anonymous referees and the editor Richard Green for useful remarks. Any errors are our own.
  • Felix Kubler,

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    • Judd is at the Hoover Institution, Kubler is at Stanford University, and Schmedders is at Northwestern University. We are grateful to Larry Jones, Mordecai Kurz, Michael Magill, Tom Sargent, and seminar participants at Carnegie Mellon University and the Hoover Institution for helpful comments. We also thank two anonymous referees and the editor Richard Green for useful remarks. Any errors are our own.
  • Karl Schmedders

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    • Judd is at the Hoover Institution, Kubler is at Stanford University, and Schmedders is at Northwestern University. We are grateful to Larry Jones, Mordecai Kurz, Michael Magill, Tom Sargent, and seminar participants at Carnegie Mellon University and the Hoover Institution for helpful comments. We also thank two anonymous referees and the editor Richard Green for useful remarks. Any errors are our own.

Abstract

Trading volume of infinitely lived securities, such as equity, is generically zero in Lucas asset pricing models with heterogeneous agents. More generally, the end-of-period portfolio of all securities is constant over time and states in the generic economy. General equilibrium restrictions rule out trading of equity after an initial period. This result contrasts the prediction of portfolio allocation analyses that portfolio rebalancing motives produce nontrivial trade volume. Therefore, other causes of trade must be present in asset markets with large trading volume.

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