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Stock Exchange Competition in a Simple Model of Capital Market Equilibrium

  • Sofia B. RAMOS

    (ISCTE-Business School and CEMAF)

  • Ernst-Ludwig VON THADDEN

    (HEC-University of Lausanne, FAME and CEPR)

This paper uses a simple model of mean-variance asset pricing with transaction costs to analyze one of the main empirical phenomena in stock market competition in the last years, the decrease of transaction costs. We endogenize transaction costs as variables strategically influenced by stock exchanges and model stock market integration as an increase in the correlation of the underlying stock market returns. Among other things, we find that market integration leads to a decrease of transaction costs and to an increase in long-term trading activity.

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Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp109.

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Date of creation: Nov 2003
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Handle: RePEc:fam:rpseri:rp109
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  1. Gehrig, Thomas, 1998. "Competing markets," European Economic Review, Elsevier, vol. 42(2), pages 277-310, February.
  2. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
  3. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
  4. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
  5. Fernando, Chitru S., 2003. "Commonality in liquidity: transmission of liquidity shocks across investors and securities," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 233-254, July.
  6. 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.
  7. Pagano, Marco & Röell, Ailsa A & Zechner, Josef, 2001. "The Geography of Equity Listing: Why Do Companies List Abroad?," CEPR Discussion Papers 2681, C.E.P.R. Discussion Papers.
  8. R Portes & H Rey, 2000. "The Determinants Of Cross-Border Equity Flows," CEP Discussion Papers dp0446, Centre for Economic Performance, LSE.
  9. Hong Liu, 2004. "Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets," Journal of Finance, American Finance Association, vol. 59(1), pages 289-338, 02.
  10. Pagano, Marco, 1986. "Endogenous Market Thinness and Stock Price Volatility," CEPR Discussion Papers 146, C.E.P.R. Discussion Papers.
  11. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers.
  12. 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.
  13. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
  14. 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.
  15. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 2001. "Liquidity, Volatility and Equity Trading Costs across Countries and over Time," International Finance, Wiley Blackwell, vol. 4(2), pages 221-55, Summer.
  16. Thierry Foucault & Christine A. Parlour, 2004. "Competition for Listings," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 329-355, Summer.
  17. George M. Constantinides, 1979. "Multiperiod Consumption and Investment Behavior with Convex Transactions Costs," Management Science, INFORMS, vol. 25(11), pages 1127-1137, November.
  18. Kpate ADJAOUTE & Jean-Pierre DANTHINE, 2001. "Portfolio Diversification: Alive and well in Euroland !," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.08, Université de Lausanne, Faculté des HEC, DEEP.
  19. 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.
  20. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
  21. 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.
  22. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
  23. Harald Hau, 2001. "Location Matters: An Examination of Trading Profits," Journal of Finance, American Finance Association, vol. 56(5), pages 1959-1983, October.
  24. 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.
  25. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  26. Carmine Di Noia, 2001. "Competition and Integration among Stock Exchanges in Europe: Network Effects, Implicit Mergers and Remote Access," European Financial Management, European Financial Management Association, vol. 7(1), pages 39-72.
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