Transaction costs and asset prices: a dynamic equilibrium model

Dimitri Vayanos

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this article we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with a riskless, liquid bond, and many risky stocks carrying proportional transaction costs. We obtain stock prices and turnover in closed form. Surprisingly, a stock's price may increase in transaction costs, and a more frequently traded stock may be less adversely affected by an increase in transaction costs. Calculations based on the 'marginal' investor overestimate the effects of transaction costs. For realistic parameter values, transaction costs have very small effects on stock prices but large effects on turnover.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (192)

Published in Review of Financial Studies, 1998, 11(1), pp. 1-58. ISSN: 0893-9454

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Related works:
Journal Article: Transaction Costs and Asset Prices: A Dynamic Equilibrium Model (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:451

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