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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
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  1. 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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  19. George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, vol. 25(11), pages 1127-1137, November.
  20. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
  21. Pagano, Marco, 1986. "Endogenous Market Thinness and Stock Price Volatility," CEPR Discussion Papers 146, C.E.P.R. Discussion Papers.
  22. John S. Hughes & Steven Huddart & Markus K Brunnermeier, 1998. "Disclosure Requirements and Stock Exchange Listing Choice in an International Context," FMG Discussion Papers dp282, Financial Markets Group.
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  26. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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