Asset Prices and Trading Volume Under Fixed Transactions Costs

Andrew Lo (), Harry Mamaysky and Jiang Wang

Yale School of Management Working Papers from Yale School of Management

Abstract: We propose a dynamic equilibrium model of asset prices and trading volume with heterogeneous agents fixed transactions costs. We show that even small fixed costs can give rise to large "no-trade" regions for each agent's optimal trading policy and a significant illiquidity discount in asset prices. We perform a calibration exercise to illustrate the empirical relevance of our model for aggregate data. Our model also has implications for the dynamics of order flow, bid/ask spreads, market depth, the allocation of trading costs between buyers and sellers, and other aspects of market microstructure, including a square-root power law between trading volume and fixed costs which we confirm using historical US stock market data from 1993 to 1997.

Keywords: Asset Pricing; Liquidity; Trading Volume; Transaction Costs (search for similar items in EconPapers)
Date: 2001-06-01, Revised 2009-09-01
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Related works:
Working Paper: Asset Prices and Trading Volume Under Fixed Transactions Costs (2009)
Journal Article: Asset Prices and Trading Volume under Fixed Transactions Costs (2004)
Working Paper: Asset Prices and Trading Volume Under Fixed Transactions Costs (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:ysm188

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