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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.

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File URL: http://www.csef.it/WP/wp123.pdf
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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 123.

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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.
Handle: RePEc:sef:csefwp:123
Contact details of provider: Postal: I-80126 Napoli
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Web page: http://www.csef.it/Email:


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  1. 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.
  2. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  3. Cipriani Marco & Guarino Antonio, 2008. "Herd Behavior and Contagion in Financial Markets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-56, October.
  4. Décamps, Jean-Paul & Lovo, Stefano, 2003. "Risk Aversion and Herd Behavior in Financial Markets," IDEI Working Papers 246, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," Experimental 0502002, EconWPA.
  6. Hirshleifer, David & Teoh, Siew Hong, 2001. "Herd Behavior and Cascading in Capital Markets: A Review and Synthesis," MPRA Paper 5186, University Library of Munich, Germany.
  7. 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.
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