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Transaction costs, frequent trading, and stock prices

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  • Isaenko, Sergey

Abstract

I consider the effects of quadratic transaction costs on stock prices. It is optimal for investors to trade frequently with relatively small amounts in the presence of such costs. Contrary to previous papers that report that the strongest effects that transaction costs can have on the risk premium are of the order of a few percent, I find that the effects could be of the order of tens of percent conditioned that investors are sufficiently heterogeneous. Frequent trading in the presence of transaction costs substantially changes heterogeneity in demands across investors, resulting in a significant liquidity premium.

Suggested Citation

  • Isaenko, Sergey, 2023. "Transaction costs, frequent trading, and stock prices," Journal of Financial Markets, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:finmar:v:64:y:2023:i:c:s1386418122000647
    DOI: 10.1016/j.finmar.2022.100775
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    References listed on IDEAS

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    More about this item

    Keywords

    Equilibrium; Asset pricing; Transaction costs; Frequent trading;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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