Asset prices, trading volumes, and investor welfare in markets with transaction costs
We investigate how an increase in transaction costs affect the equilibrium asset prices and allocations. We find a sufficient condition for an increase in transaction costs to increase buying prices, decrease selling prices, decrease the trading volume, and make all active traders worse off. The sufficient condition is met by a general class of utility functions, which contains all CARA utility functions and even some non-HARA utility functions. As for CRRA utility functions, the class contains all utility functions with CRRA coefficients less than or equal to one. We show that whenever there is an agent with a CRRA coefficient greater than one, an increase in transaction costs may well decrease buying prices and make buyers better off.
|Date of creation:||May 2012|
|Date of revision:|
|Contact details of provider:|| Postal: 2-1 Naka, Kunitachi City, Tokyo 186-8603|
Web page: http://cis.ier.hit-u.ac.jp/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- 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.
- Rohit Rahi & James Dow, 1998.
"Should Speculators be Taxed?,"
FMG Discussion Papers
dp291, Financial Markets Group.
- JÃ¼rgen Antony & Michiel Bijlsma & Adam Elbourne & Marcel Lever & Gijsbert Zwart, 2012. "Financial transaction tax: review and assessment," CPB Discussion Paper 202, CPB Netherlands Bureau for Economic Policy Analysis.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
- Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 63-86.
- Neil McCulloch & Grazia Pacillo, 2010. "The Tobin Tax A Review of the Evidence," Working Paper Series 1611, Department of Economics, University of Sussex.
- 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.
- Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics 451, London School of Economics and Political Science, LSE Library.
- James Tobin, 1978.
"A Proposal for International Monetary Reform,"
Cowles Foundation Discussion Papers
506, Cowles Foundation for Research in Economics, Yale University.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, December.
When requesting a correction, please mention this item's handle: RePEc:hit:cisdps:556. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Resources Section, Hitotsubashi University Library)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.