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Asset Prices and Trading Volume Under Fixed Transactions Costs

  • Andrew Lo
  • Harry Mamaysky
  • Jiang Wang

We propose a dynamic equilibrium model of asset prices and trading volume with heterogeneous agents fixed transactions costs. We show that even small fixed costs can give rise to large "no-trade" regions for each agent's optimal trading policy and a significant illiquidity discount in asset prices. We perform a calibration exercise to illustrate the empirical relevance of our model for aggregate data. Our model also has implications for the dynamics of order flow, bid/ask spreads, market depth, the allocation of trading costs between buyers and sellers, and other aspects of market microstructure, including a square-root power law between trading volume and fixed costs which we confirm using historical US stock market data from 1993 to 1997.

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File URL: http://icfpub.som.yale.edu/publications/2403
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm188.

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Date of creation: 01 Jun 2001
Date of revision: 01 Sep 2009
Handle: RePEc:ysm:somwrk:ysm188
Contact details of provider: Web page: http://icf.som.yale.edu/

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