Content Summary : If price and quantity are the fundamental building blocks of any theory of market interac-tions, the importance of trading volume in understanding the behavior of financial marketsis clear. However, while many economic models of financial markets have been developedto explain the behavior of prices—predictability, variability, and information content—farless attention has been devoted to explaining the behavior of trading volume. In this arti-cle, we hope to expand our understanding of trading volume by developing well-articulatedeconomic models of asset prices and volume and empirically estimating them using recentlyavailable daily volume data for individual securities from the University of Chicago’s Centerfor Research in Securities Prices. Our theoretical contributions include: (1) an economicdefinition of volume that is most consistent with theoretical models of trading activity; (2)the derivation of volume implications of basic portfolio theory; and (3) the development of anintertemporal equilibrium model of asset market in which the trading process is determinedendogenously by liquidity needs and risk-sharing motives. Our empirical contributions in-clude: (1) the construction of a volume/returns database extract of the CRSP volume data;(2) comprehensive exploratory data analysis of both the time-series and cross-sectional prop-erties of trading volume; (3) estimation and inference for price/volume relations implied byasset-pricing models; and (4) a new approach for empirically identifying factors to be in-cluded in a linear-factor model of asset returns using volume data.