The Dynamic Properties of Financial-Market Equilibrium with Trading Fees

61 Pages Posted: 3 Aug 2015 Last revised: 14 Jul 2023

See all articles by Adrian Buss

Adrian Buss

Frankfurt School of Finance & Management; 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: July 2015

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.

Suggested Citation

Buss, Adrian and Dumas, Bernard, The Dynamic Properties of Financial-Market Equilibrium with Trading Fees (July 2015). NBER Working Paper No. w21421, Available at SSRN: https://ssrn.com/abstract=2638972

Adrian Buss (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bernard Dumas

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/

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