This paper uses a simple model of mean-variance asset pricing with transaction costs to analyze one of the main empirical phenomena in stock market competition in the last years, the decrease of transaction costs. We endogenize transaction costs as variables strategically influenced by stock exchanges and model stock market integration as an increase in the correlation of the underlying stock market returns. Among other things, we find that market integration leads to a decrease of transaction costs and to an increase in long-term trading activity.
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Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number
rp109.