Working Paper: NBER ID: w19155
Authors: Adrian Buss; Bernard 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; endogenous liquidity risk; dynamic general equilibrium
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) | trading strategies (G13) |
| trading strategies (G13) | consumption volatility (E20) |
| trading fees (D49) | consumption volatility (E20) |
| consumption volatility (E20) | interest rates (E43) |
| trading fees (D49) | risk associated with holding stocks (G12) |
| risk associated with holding stocks (G12) | demand for stocks (J23) |
| demand for stocks (J23) | price discount for stocks (G12) |
| consumption volatility (E20) | bond prices (G12) |
| trading fees (D49) | no-trade region (F14) |