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Asset Prices, Trading Volumes, and Investor Welfare in Markets with Transaction Costs

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  • Chiaki Hara

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    (Institute of Economic Research, Kyoto University)

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    Abstract

    In 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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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP862.pdf
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    Bibliographic Info

    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 862.

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    Date of creation: Apr 2013
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    Handle: RePEc:kyo:wpaper:862

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    Keywords: General equilibrium; asset markets; transaction costs; Tobin tax; constant absolute risk aversion; constant relative risk aversion.;

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    1. Dow, J. & Rahi, R., 1997. "Should Speculators be Taxed?," Economics Working Papers, European University Institute eco97/21, European University Institute.
    2. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, Econometric Society, vol. 41(5), pages 867-87, September.
    3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195102680, October.
    4. Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 451, London School of Economics and Political Science, LSE Library.
    5. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers, University of Iowa, Department of Economics 95-05, University of Iowa, Department of Economics.
    6. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
    7. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 506, Cowles Foundation for Research in Economics, Yale University.
    8. Jürgen Antony & Michiel Bijlsma & Adam Elbourne & Marcel Lever & Gijsbert Zwart, 2012. "Financial transaction tax: review and assessment," CPB Discussion Paper 202, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 2(2), pages 63-86.
    10. Neil McCulloch & Grazia Pacillo, 2011. "The Tobin Tax A Review of the Evidence," Working Paper Series 1611, Department of Economics, University of Sussex.
    11. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers, Columbia - Center for Futures Markets t2, Columbia - Center for Futures Markets.
    12. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 842-62, August.
    13. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
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    Cited by:
    1. Masaaki Kijima & Akihisa Tamura, 2014. "Buhlmann’s Economic Premium Principle in The Presence of Transaction Costs," KIER Working Papers, Kyoto University, Institute of Economic Research 893, Kyoto University, Institute of Economic Research.

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