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The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees

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  • ADRIAN BUSS
  • BERNARD DUMAS

Abstract

We incorporate trading fees into a dynamic, multiagent general‐equilibrium model in which traders optimally decide when to trade. For that purpose, we propose an innovative algorithm that synchronizes the traders. Securities prices are not so much affected by the payment of the fees itself, but rather by the trade‐off that the traders face between smoothing consumption and smoothing holdings. In calibrated examples, the interest rate and welfare decline with trading fees, while risk premia and volatilities increase. Liquidity risk and expected liquidity are priced, leading to deviations from the consumption‐CAPM. With trading fees, capital is slow‐moving, generating slow price reversal.

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  • Adrian Buss & Bernard Dumas, 2019. "The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees," Journal of Finance, American Finance Association, vol. 74(2), pages 795-844, April.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:2:p:795-844
    DOI: 10.1111/jofi.12744
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    4. Buss, Adrian & Uppal, Raman & Vilkov, Grigory, 2015. "Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs," SAFE Working Paper Series 41, Leibniz Institute for Financial Research SAFE, revised 2015.
    5. Thomas Poufinas, 2015. "On Transaction-Cost Models in Continuous-Time Markets," IJFS, MDPI, vol. 3(2), pages 1-34, April.
    6. Lukas Gonon & Johannes Muhle‐Karbe & Xiaofei Shi, 2021. "Asset pricing with general transaction costs: Theory and numerics," Mathematical Finance, Wiley Blackwell, vol. 31(2), pages 595-648, April.
    7. N. Serhan Aydin, 2016. "Time value of extra information against its timely value," Papers 1610.04051, arXiv.org.
    8. Isaenko, Sergey, 2015. "Equilibrium theory of stock market crashes," Journal of Economic Dynamics and Control, Elsevier, vol. 60(C), pages 73-94.
    9. Isaenko, Sergey, 2023. "Transaction costs, frequent trading, and stock prices," Journal of Financial Markets, Elsevier, vol. 64(C).
    10. Chabakauri, Georgy & Rytchkov, Oleg, 2014. "Asset pricing with index investing," LSE Research Online Documents on Economics 60739, London School of Economics and Political Science, LSE Library.
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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