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Stock exchange competition in a simple model of capital market equilibrium

  • Ramos, Sofia B.
  • von Thadden, Ernst-Ludwig

This paper uses a simple model of mean-variance capital markets equilibrium with proportional transactions costs to analyze the competition of stock markets for investors. We assume that equity trading is costly and endogenize transactions costs as variables strategically influenced by stock exchanges. Among other things, the model predicts that increasing financial market correlation leads to a decrease of transaction costs, an increase in cross-border trading activity, and to a decrease in the home bias of international equity flows. These predictions are consistent with the recent evolution of international stock markets.

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Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 11 (2008)
Issue (Month): 3 (August)
Pages: 284-307

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Handle: RePEc:eee:finmar:v:11:y:2008:i:3:p:284-307
Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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  1. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "Financial Globalization and Exchange Rates," IMF Working Papers 05/3, International Monetary Fund.
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  5. Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics 451, London School of Economics and Political Science, LSE Library.
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  8. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
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  10. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
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  17. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  18. Harald Hau, 2001. "Location Matters: An Examination of Trading Profits," Journal of Finance, American Finance Association, vol. 56(5), pages 1959-1983, October.
  19. George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, vol. 25(11), pages 1127-1137, November.
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  22. Pankaj K. Jain, 2005. "Financial Market Design and the Equity Premium: Electronic versus Floor Trading," Journal of Finance, American Finance Association, vol. 60(6), pages 2955-2985, December.
  23. Ian Domowitz & Jack Glen & Ananth Madhavan, 2000. "Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time," William Davidson Institute Working Papers Series 322, William Davidson Institute at the University of Michigan.
  24. Geert Bekaert & Campbell R. Harvey & Robin L. Lumsdaine, 1998. "Dating the Integration of World Equity Markets," NBER Working Papers 6724, National Bureau of Economic Research, Inc.
  25. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
  26. Benn Steil, . "Changes in the Ownership and Governance of Securities Exchanges: Causes and Consequences," Center for Financial Institutions Working Papers 02-15, Wharton School Center for Financial Institutions, University of Pennsylvania.
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