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Capital Market Equilibrium with Transaction Costs

In: Theory Of Valuation

Listed author(s):
  • George M. Constantinides

    (University of Chicago, USA and Harvard University, USA)

AbstractA two-asset, intertemporal portfolio selection model is formulated incorporating proportional transaction costs. The demand for assets is shown to be sensitive to these costs. However, transaction costs have only a second-order effect on the liquidity premia implied by equilibrium asset returns: the derived utility is insensitive to deviations from the optimal portfolio proportions, and investors accommodate large transaction costs by drastically reducing the frequency and volume of trade. A single-period model with an appropriately chosen length of period does not imply the same liquidity premium as the intertemporal model because the appropriate length of the time period is asset specific.

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This chapter was published in:
  • Sudipto Bhattacharya & George M Constantinides (ed.), 2005. "Theory of Valuation," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 5860, July-Dece.
  • This item is provided by World Scientific Publishing Co. Pte. Ltd. in its series World Scientific Book Chapters with number 9789812701022_0007.
    Handle: RePEc:wsi:wschap:9789812701022_0007
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