Chong, Zhiwei (2010): Rational expectations equilibrium with transaction costs in financial markets.
Download (266Kb) | Preview
We obtain a closed-form solution to rational expectations equilibrium with transaction costs in the framework of Grossman and Stiglitz (1980) [On the impossibility of informationally efficient markets. American Economic Review 70, 543-566]. Individual private information incorporated into prices is reduced due to suppressed trading activities by transaction costs. The equilibrium fraction of informed traders increases (decreases) with transaction costs when the costs are low (high). The informativeness of prices decreases with transaction costs.
|Item Type:||MPRA Paper|
|Original Title:||Rational expectations equilibrium with transaction costs in financial markets|
|Keywords:||rational expectations; transaction cost; information acquisition|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
|Depositing User:||Zhiwei Chong|
|Date Deposited:||02. Nov 2011 01:50|
|Last Modified:||16. Feb 2013 08:35|
Barron, O. E., Karpo, J. M., 2004. Information precision, transaction costs, and trading volume, Journal of Banking & Finance 28, 1207-1223.
Constantinides, G. M., 1986. Capital market equilibrium with transaction costs, Journal of Political Economy, 94, 842-862.
Garleanu, N., Pedersen, L. H., 2011. Dynamic trading with predictable returns and transaction costs. New York University Working Paper.
Grossman, S. J., Stiglitz, J. E., 1980. On the impossibility of informationally effcient markets. American Economic Review 70, 543-566.
Heaton, J., and Lucas, D., 1996. Evaluating the effects of incomplete markets on risk sharing and asset pricing. Journal of Political Economy 104, 443-487.
Liu, H., 2004. Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets, Journal of Finance, 59, 289-338.
Liu, H., Loewenstein M. , 2002. Optimal Portfolio Selection with Transaction Costs and Finite Horizons, Review of Financial Studies, 15, 805-835.
Liu, H., Wang Y. J. , 2011. Asymmetric Information, Endogenous Illiquidity, and Asset Pricing with Imperfect Competition, Washington University in St. Louis Working paper. Lo, A. W., Mamysky H., Wang J., 2004. Asset prices and trading volume under fixed transaction costs, Journal of Political Economy, 112, 2054-2109.