Munich Personal RePEc Archive

Rational expectations equilibrium with transaction costs in financial markets

Chong, Zhiwei (2010): Rational expectations equilibrium with transaction costs in financial markets.

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Abstract

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.

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