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Pump up the Volume: Income Risk and Counter-cyclical Asset Trading

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Eastern Economic Journal Aims and scope

Abstract

This paper develops a model of consumption smoothing using financial assets, incomplete markets, and idiosyncratic shocks. It contributes to the literature on asset markets by exposing a structural break in stock trading volume in the 1970s, which in turn demonstrates a negative correlation between trading volume and aggregate output. The model is able to not only match the correct sign of this correlation but also a portion of the standard deviation of turnover.

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Notes

  1. All breakpoints are checked using Clemente et al. (1998) as well as Zivot Andrews.

  2. See section 135(a) of the Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. 2763, 2785 (November 6, 1978).

  3. Changing breakpoint to any date in 1972–1982 range does not alter the sign or significance of correlations reported in this paper.

  4. See social security administration advisory council deliberations 1994–1995 (http://www.ssa.gov/history/reports/adcouncil/tirs1.html#PolicyOptions) which was reintroduced during the Presidency of George W. Bush.

  5. See European Commission discussion of the implementation of a financial transaction tax (http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm).

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Acknowledgements

I would like to thank Christopher Otrok and Eric Young for their help and guidance. I would also like to thank the seminar participants at the Southern Economic Association, the Eastern Economic Association, and Wesleyan University. I would finaly like to thank the anonymous referees for their helpful comments. All errors remain mine.

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  1. Department of Economics and Business, Drew University, 36 Madison Ave, Madison, 07940, NJ, USA

    Gian Domenico Sarolli

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Sarolli, G. Pump up the Volume: Income Risk and Counter-cyclical Asset Trading. Eastern Econ J 42, 594–610 (2016). https://doi.org/10.1057/eej.2014.80

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