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Asset Prices, Trading Volumes, and Investor Welfare in Markets with Transaction Costs

  • Chiaki Hara

    ()

    (Institute of Economic Research, Kyoto University)

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    In a model of asset markets with transaction costs, we find a sufcient condition for an increase in transaction costs to increase buying prices, decrease selling prices, decrease the trading volume, and make all active investors worse off. The sufficient condition is met by all CARA utility functions. As for CRRA utility functions, it is met if and only if CRRA coefficients are less than or equal to one. We show that whenever some investor has a CRRA coefficient greater than one, an increase in transaction costs may well decrease buying prices and make buyers better off.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP862.pdf
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    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 862.

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    Date of creation: Apr 2013
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    Handle: RePEc:kyo:wpaper:862
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    1. Jürgen 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.
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    6. 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.
    7. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    8. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
    9. Neil McCulloch & Grazia Pacillo, 2010. "The Tobin Tax A Review of the Evidence," Working Paper Series 1611, Department of Economics, University of Sussex.
    10. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, June.
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    12. 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.
    13. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
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