Can market volumes reveal traders' rationality and a new risk premium?

Abstract: An empirical analysis, suggested by optimal Merton dynamics, reveals some unexpected features of asset volumes. These features are connected to traders' belief and risk aversion. This paper proposes a trading strategy model in the optimal Merton framework that is representative of the collective behavior of heterogeneous rational traders. This model allows for the estimation of the average risk aversion of traders acting on a specific risky asset, while revealing the existence of a price of risk closely related to market price of risk and volume rate. The empirical analysis, conducted on real data, confirms the validity of the proposed model.