Asset Prices, Trading Volumes, and Investor Welfare in Markets with Transaction Costs
AbstractIn a model of asset markets with transaction costs, we find a sufcient condition for an increase in transaction costs to increase buying prices, decrease selling prices, decrease the trading volume, and make all active investors worse off. The sufficient condition is met by all CARA utility functions. As for CRRA utility functions, it is met if and only if CRRA coefficients are less than or equal to one. We show that whenever some investor has a CRRA coefficient greater than one, an increase in transaction costs may well decrease buying prices and make buyers better off.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 862.
Date of creation: Apr 2013
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General equilibrium; asset markets; transaction costs; Tobin tax; constant absolute risk aversion; constant relative risk aversion.;
Find related papers by JEL classification:
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-27 (All new papers)
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