THE DETERMINANTS OF AVERAGE TRADE SIZE

A central, but largely untested, assumption in the modern literature o n financial markets is that investors trade strategically, taking acco unt of the effect of their trades on prices. We use a simultaneous equ ations approach motivated by theoretical analysis to test this assumpt ion empirically. The results point to a strong and negative cross-sect ional relation between the average trade size and estimated fixed and variable costs of transacting per share, consistent with strategic tra ding. We also find that average trade size is positively related to re turn volatility, the standard deviation of trading volume, and the pro portion of shares held by institutional investors.