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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Publication status: published as 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.
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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, 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, Yale School of Management 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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