The Dynamic Properties of Financial-Market Equilibrium with Trading Fees

68 Pages Posted: 16 Mar 2011 Last revised: 30 Dec 2017

See all articles by Adrian Buss

Adrian Buss

INSEAD - Finance; Centre for Economic Policy Research (CEPR)

Bernard Dumas

INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 30, 2017

Abstract

We incorporate trading fees into a dynamic, multi-agent general-equilibrium model in which traders optimally decide when to trade. For that purpose, we propose an innovative algorithm that synchronizes the traders. Securities prices are not affected by the payment of the fees itself, but rather by the trade-off between smoothing consumption and smoothing holdings that the traders face. In calibrated examples, the interest rate and welfare decline, while risk premia and volatilities increase with trading fees. Liquidity risk and expected liquidity are priced, leading to deviations from the consumption-CAPM. With trading fees, capital is slow-moving which leads to slow price reversal.

Keywords: trading fees, slow-moving capital, general equilibrium, endogenous illiquidity

JEL Classification: C63, C68, D52, D58, E44, G12

Suggested Citation

Buss, Adrian and Dumas, Bernard, The Dynamic Properties of Financial-Market Equilibrium with Trading Fees (December 30, 2017). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1785265 or http://dx.doi.org/10.2139/ssrn.1785265

Adrian Buss

INSEAD - Finance ( email )

Boulevard de Constance
Fontainebleau Cedex, 77305
France
+33 160 72 44 84 (Phone)
+33 160 72 40 45 (Fax)

HOME PAGE: http://sites.google.com/view/abuss

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bernard Dumas (Contact Author)

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 60 72 49 92 (Phone)
+33 1 60 72 40 45 (Fax)

HOME PAGE: http://www.insead.fr/~dumas/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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