Arbitrage Equilibrium with Transaction Costs
The general topic of this paper is the transmission of disturbances in asset markets. The specific topic is the role of transaction costs in this transmission. Do high transaction costs shelter a market against foreign disturbances while 'bottling up' domestic disturbances at home? The question is considered in the context of a small-scale general equilibrium model of asset arbitrage with quadratic transaction cost functions. The main conclusion is that the transmission of (disturbances depends more on the relationships between different transaction cost rates than on their absolute level. A progressive decline of transaction costs, therefore, does not necessarily strengthen the transmission of disturbances, nor can artificial increases of transaction costs be relied upon to reduce it. Copyright 1994 by Ohio State University Press.
Volume (Year): 26 (1994)
Issue (Month): 2 (May)
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