Working Paper: NBER ID: w21421
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: trading fees; financial market equilibrium; dynamic general equilibrium; trader behavior; asset pricing
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) | consumption volatility (E20) |
| trading fees (D49) | trading decisions (G11) |
| trading fees (D49) | equilibrium asset prices (G19) |
| trading fees (D49) | stock price (G12) |
| trading fees (D49) | precautionary savings motive (D14) |
| trading fees (D49) | liquidity risk premia (G19) |
| trading fees (D49) | price reversals (P22) |