Trading Volume in Dealer Markets

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 …