Working Paper: CEPR ID: DP9524
Authors: Adrian Buss; Bernard J. Dumas
Abstract: We incorporate trading fees in a long-horizon dynamic general-equilibrium model in which traders optimally and endogenously decide when and how much to trade. A full characterization of equilibrium is provided, which allows us to study the dynamics of equilibrium trades, equilibrium asset prices and rates of return in the presence of trading fees. We exhibit the effect of trading fees on deviations from the consumption-CAPM and analyze the pricing of endogenous liquidity risk. We compare, for the same shocks, the impulse responses of this model to those of a model in which trading is infrequent because of trader inattention.
Keywords: financial market equilibrium; trading fees; liquidity risk
JEL Codes: G10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading fees (D49) | deviations from the consumption-CAPM (D11) |
| trading fees (D49) | increased consumption volatility (E21) |
| increased consumption volatility (E21) | affects portfolio decisions (G11) |
| trading fees (D49) | price of a risk-free bond increases (E43) |
| price of a risk-free bond increases (E43) | lower interest rates (E43) |
| trading fees (D49) | alters trading strategies (C69) |
| trading fees (D49) | equilibrium asset prices (G19) |
| trading fees (D49) | higher price for stocks (G19) |
| trading fees (D49) | increased liquidity risk premia (G19) |