Transaction costs and informational cascades in financial markets

Marco Cipriani and Antonio Guarino

Journal of Economic Behavior & Organization, 2008, vol. 68, issue 3-4, 581-592

Abstract: We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We implement a financial market with sequential trading and transaction costs in the laboratory. According to theory, eventually all traders neglect their private information and abstain from trading (i.e., a no-trade informational cascade occurs). We find that, in the experiment, informational no-trade cascades occur when theory predicts they should (i.e., when the trade imbalance is sufficiently high). At the same time, the proportion of subjects irrationally trading against their private information is smaller than in a financial market without transaction costs. As a result, the overall efficiency of the market is not significantly affected by the presence of transaction costs.

Keywords: Informational; cascades; Herd; behavior; Transaction; costs; Tobin; tax (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167-2681(08)00168-6
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:68:y:2008:i:3-4:p:581-592

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().