Equilibrium interest rate and liquidity premium with transaction costs
AbstractIn this article we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with two riskless assets. The first asset is liquid while the second asset carries proportional transaction costs. We show that agents buy the liquid asset for short-term investment and the illiquid asset for long-term investment. When transaction costs increase, the price of the liquid asset increases. The price of the illiquid asset decreases if the asset is in small supply, but may increase if the supply is large. These results have implications for the effects of transaction taxes and commission deregulation.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 13 (1999)
Issue (Month): 3 ()
Note: Received: December 5, 1997; revised version: March 19, 1998
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Vayanos, Dimitri & Vila, Jean-Luc, 1999. "Equilibrium interest rate and liquidity premium with transaction costs," Open Access publications from London School of Economics and Political Science http://eprints.lse.ac.uk/, London School of Economics and Political Science.
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