Working Paper: CEPR ID: DP10737
Authors: Adrian Buss; Bernard J. Dumas
Abstract: In some situations, investment capital seems to move slowly towards profitabletrades. We develop a model of a financial market in which capital moves slowly simplybecause there is a proportional cost to moving capital. We incorporate trading feesin an infinite-horizon dynamic general-equilibrium model in which investors optimallyand endogenously decide when and how much to trade. We determine the steady-stateequilibrium no-trade zone, study the dynamics of equilibrium trades and prices andcompare, for the same shocks, the impulse responses of this model to those of a modelin which trading is infrequent because of investor inattention.
Keywords: frictions; general equilibrium; slow-moving capital; trading fees
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading fees (D49) | slow capital movement (F21) |
| trading fees (D49) | no-trade region (F14) |
| trading fees (D49) | lower trading volumes (G19) |
| trading fees (D49) | slower price adjustments (E31) |
| trading fees (D49) | increased equilibrium prices (D59) |