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Trading Costs and Informational Efficiency

Author

Listed:
  • Cecilia Parlatore

    (New York University Stern)

  • Eduardo Davila

    (New York University)

Abstract

Abstract This paper studies the effect of trading costs on information diffusion and information acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex-ante identical: the level of trading costs does not affect price informativeness or price volatility. This result holds independently of whether investors behave competitively or strategically and applies to both static and dynamic economies. When investors are ex-ante heterogeneous, trading costs affect price informativeness if and only if investors who disproportionately trade on information are more elastic than investors who mostly trade due to hedging. Trading costs always reduce information acquisition, even when price informativeness remains unchanged for a given amount of information. Our results matter to understand a) the consequences of cheaper financial trading and b) the effects of transaction taxes.

Suggested Citation

  • Cecilia Parlatore & Eduardo Davila, 2016. "Trading Costs and Informational Efficiency," 2016 Meeting Papers 494, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:494
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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