Asset Prices and Trading Volume Under Fixed Transactions Costs
AbstractWe propose a dynamic equilibrium model of asset prices and trading volume with heterogeneous agents facing fixed transactions costs. We show that even small fixed costs can give rise to large 'no-trade' regions for each agent's optimal trading policy and a significant illiquidity discount in asset prices. We perform a calibration exercise to illustrate the empirical relevance of our model for aggregate data. Our model also has implications for the dynamics of order flow, bid/ask spreads, market depth, the allocation of trading costs between buyers and sellers, and other aspects of market microstructure, including a square-root power law between trading volume and fixed costs which we confirm using historical US stock market data from 1993 to 1997.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8311.
Date of creation: May 2001
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Other versions of this item:
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2004. "Asset Prices and Trading Volume under Fixed Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1054-1090, October.
- Andrew Lo & Harry Mamaysky & Jiang Wang, 2001. "Asset Prices and Trading Volume Under Fixed Transactions Costs," Yale School of Management Working Papers ysm188, Yale School of Management, revised 01 Sep 2009.
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-06-08 (All new papers)
- NEP-FIN-2001-06-08 (Finance)
- NEP-FMK-2001-06-08 (Financial Markets)
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