Rational expectations equilibrium with transaction costs in financial markets
We obtain a closed-form solution to a rational expectations equilibrium model with transaction costs in the framework of Grossman and Stiglitz [1980. American Economic Review 70, 543–566]. Individual private information incorporated into prices is reduced due to suppressed trading activities by transaction costs. The fraction of informed traders in equilibrium increases (decreases) with transaction costs when the costs are low (high). The informativeness of prices decreases with transaction costs.
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- 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.
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2001. "Asset Prices and Trading Volume Under Fixed Transactions Costs," NBER Working Papers 8311, National Bureau of Economic Research, Inc.
- Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-487, June.
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- Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
- Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
- Hong Liu, 2004. "Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets," Journal of Finance, American Finance Association, vol. 59(1), pages 289-338, February.
- George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters,in: Theory Of Valuation, chapter 7, pages 207-227 World Scientific Publishing Co. Pte. Ltd..
- Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-862, August.
- Hong Liu & Mark Loewenstein, 2002. "Optimal Portfolio Selection with Transaction Costs and Finite Horizons," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 805-835. Full references (including those not matched with items on IDEAS)
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