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Impediments to Financial Trade: Theory and Applications

Author

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  • Nicolae Gârleanu
  • Stavros Panageas
  • Jianfeng Yu
  • Stijn Van Nieuwerburgh

Abstract

We propose a tractable model of an informationally inefficient market featuring nonrevealing prices, general preferences and payoff distributions, but not noise traders. We show the equivalence between our model and a substantially simpler one in which investors face distortionary investment taxes depending on both their identity and the asset class. This equivalence allows us to account for such phenomena as underdiversification. We further employ the model to assess approaches to performance evaluation and find that it provides a theoretical basis for some intuitive practices, such as style analysis, that have been adopted by finance professionals.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Nicolae Gârleanu & Stavros Panageas & Jianfeng Yu & Stijn Van Nieuwerburgh, 2020. "Impediments to Financial Trade: Theory and Applications," The Review of Financial Studies, Society for Financial Studies, vol. 33(6), pages 2697-2727.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:6:p:2697-2727.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz095
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    Cited by:

    1. Buffa, Andrea M. & Hodor, Idan, 2023. "Institutional investors, heterogeneous benchmarks and the comovement of asset prices," Journal of Financial Economics, Elsevier, vol. 147(2), pages 352-381.
    2. Iachan, Felipe S. & Silva, Dejanir & Zi, Chao, 2022. "Under-diversification and idiosyncratic risk externalities," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1227-1250.

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