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Trading Costs and Informational Efficiency

Eduardo Dávila and Cecilia Parlatore

No 25662, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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, anything goes, and 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.

JEL-codes: D82 D83 G14 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-fmk and nep-mst
Note: AP EFG IFM
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