Rational expectations equilibrium with transaction costs in financial markets

Zhiwei Chong

MPRA Paper from University Library of Munich, Germany

Abstract: We obtain a closed-form solution to rational expectations equilibrium with transaction costs in the framework of Grossman and Stiglitz (1980) [On the impossibility of informationally efficient markets. American Economic Review 70, 543-566]. Individual private information incorporated into prices is reduced due to suppressed trading activities by transaction costs. The equilibrium fraction of informed traders 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: G11 G14 (search for similar items in EconPapers)
Date: 2010-07-04, Revised 2011-07-14
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