Asset Prices and Trading Volume Under Fixed Transactions Costs / Andrew W. Lo, Harry Mamaysky, Jiang Wang.

Format:

Book

Author/Creator:

Lo, Andrew W.

Contributor:

National Bureau of Economic Research.

Mamaysky, Harry.

Wang, Jiang.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8311.

NBER working paper series no. w8311

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

We propose a dynamic equilibrium model of asset prices and trading volume with heterogeneous agents facing 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.

Notes:

Print version record

May 2001.