A Research on the Dynamic Relationship between Transaction Activity and Transaction Costs

There are already many theoretical and empirical researches on the relationship between the transaction costs and transaction activity,which are two important aspects of liquidity.However,most of these researches are based on the cross-section analysis,the research on dynamic relationship between the transaction cost and transaction activity is still a blank domain.Based on ultra high frequency data,a dynamic systematic model of duration,volume and spread are presented to study the dynamic relationship between transaction costs and transaction activity.This model was applied to Chinese stock market and the results are interpreted based on the information discovery.The empirical results suggest that there are positive feedback effects between transaction costs and transaction activity.The government must prevent the malignant cycle of losing liquidity and activity by reduce the transaction costs and enhance the transaction activity.