Rational expectations equilibrium with transaction costs in financial markets

Zhiwei Chong

Finance Research Letters, 2012, vol. 9, issue 2, 73-80

Abstract: We obtain a closed-form solution to a rational expectations equilibrium model with transaction costs in the framework of Grossman and Stiglitz [1980. American Economic Review 70, 543–566]. Individual private information incorporated into prices is reduced due to suppressed trading activities by transaction costs. The fraction of informed traders in equilibrium increases (decreases) with transaction costs when the costs are low (high). The informativeness of prices decreases with transaction costs.

Keywords: Rational expectations; Transaction cost; Information acquisition (search for similar items in EconPapers)
JEL-codes: D82 D84 G11 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:9:y:2012:i:2:p:73-80

DOI: 10.1016/j.frl.2011.11.001

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