Equilibrium interest rate and liquidity premium with transaction costs

Dimitri Vayanos and Jean-Luc Vila

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

Abstract: In this paper we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with two riskless assets. The first asset is liquid while the second asset carries proportional transaction costs. We show that agents buy the liquid asset for short-term investment and the illiquid asset for long-term investment. When transaction costs increase, the price of the liquid asset increases. The price of the illiquid asset decreases if the asset is in small supply, but may increase if the supply is large. These results have implications for the effects of transaction taxes and commission deregulation.

JEL-codes: J1 (search for similar items in EconPapers)
Date: 1999-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (82)

Published in Economic Theory, April, 1999, 13(3), pp. 509-539. ISSN: 0938-2259

Downloads: (external link)
http://eprints.lse.ac.uk/453/ Open access version. (application/pdf)

Related works:
Journal Article: Equilibrium interest rate and liquidity premium with transaction costs (1999)
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:ehl:lserod:453

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().