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The Risk of Becoming Risk Averse: A Model of Asset Pricing and Trade Volumes
We develop a new general equilibrium model of asset pricing and asset trading volume in which agents? motivations to trade arise due to uninsurable idiosyncratic shocks to agents? risk tolerance. In response to these shocks, agents trade to rebalance their portfolios between risky and riskless assets. We study a positive question ? When does trade volume become a pricing factor? ? and a normative question ? What is the impact of Tobin taxes on asset trading on welfare? In our model, economies in which marketwide risk tolerance is negatively correlated with trade volume have a higher risk ...