Learning, Cascades and Transaction Costs
This paper analyzes the effect of transaction costs on the social learning in an asset market with asymmetric information, sequential trading and competitive price mechanism. Both fixed and proportional transaction costs reduce the informational content of trading orders and lead to informational cascades. If transaction costs are very high, an informational cascade can occur not only when beliefs converge to a specific asset value, but also when in the market there is complete uncertainty about the asset's fundamental value. Finally, if the asset value in the bad state is sufficiently low, proportional transaction costs lead to an informational cascade only when prices are very high.
|Date of creation:||01 Sep 2004|
|Date of revision:||01 Feb 2006|
|Publication status:||Published in Giornale degli Economisti e Annali di Economia, 2009, Volume 68, Issue 1. 81-109.|
|Contact details of provider:|| Postal: I-80126 Napoli|
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Web page: http://www.csef.it/
More information through EDIRC
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.:
- Marco Cipriani & Antonio Guarino, .
"Herd Behavior and Contagion in Financial Markets,"
2010-01, The George Washington University, Institute for International Economic Policy.
- LOVO, Stefano & DECAMPS, Jean-Paul, 2002.
"Risk aversion and herd behavior in financial markets,"
Les Cahiers de Recherche
758, HEC Paris.
- Décamps, Jean-Paul & Lovo, Stefano, 2003. "Risk Aversion and Herd Behavior in Financial Markets," IDEI Working Papers 246, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jean-Paul Decamps & Stefano Lovo, 2002. "Risk Aversion and Herd Behavior in Financial Markets," Working Papers hal-00593657, HAL.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992.
"A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades,"
Journal of Political Economy,
University of Chicago Press, vol. 100(5), pages 992-1026, October.
- Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
- Marco Cipriani & Antonio Guarino, 2005.
"Herd Behavior in a Laboratory Financial Market,"
American Economic Review,
American Economic Association, vol. 95(5), pages 1427-1443, December.
- Hirshleifer, David & Teoh, Siew Hong, 2001.
"Herd Behavior and Cascading in Capital Markets: A Review and Synthesis,"
5186, University Library of Munich, Germany.
- David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
- Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:123. 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: (Lia Ambrosio)
If references are entirely missing, you can add them using this form.