Trading Costs and Informational Efficiency
Eduardo Davila and
Journal of Finance, 2021, vol. 76, issue 3, 1471-1539
We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex ante identical: price informativeness is independent of the level of trading costs. When investors are ex ante heterogeneous, a change in trading costs can increase or decrease price informativeness, depending on the source of heterogeneity. Our results are valid under quadratic, linear, and fixed costs. Through a reduction in information acquisition, trading costs reduce price informativeness. We discuss how our results inform the policy debate on financial transaction taxes/Tobin taxes.
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Working Paper: Trading Costs and Informational Efficiency (2019)
Working Paper: Trading Costs and Informational Efficiency (2016)
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