Impediments to Financial Trade: Theory and Measurement

64 Pages Posted: 15 Aug 2015

See all articles by Nicolae Garleanu

Nicolae Garleanu

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stavros Panageas

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: January 1, 2015

Abstract

We propose a tractable model of an informationally inefficient market. We show the equivalence between our model and a substantially simpler model whereby investors face distortive investment taxes depending both on their identity and the asset class. We use this equivalence to assess existing approaches to inferring whether individual investors have informational advantages. We also develop a methodology of inferring the magnitude of the frictions (implicit taxes) that impede financial trade. We illustrate the methodology by using data on cross-country portfolio holdings and returns to quantify these frictions, and locate the directions in which financial trade seems to be especially impeded. We argue that our measure of frictions contains useful information for the sources of failure of frictionless models, and it helps in studying whether certain factors (such as the size of the financial sector) are associated with lower financial frictions.

Keywords: Financial frictions, Asset Pricing, Inefficient Markets, Performance Evaluation, Crossborder

JEL Classification: G12, G14, G15

Suggested Citation

Garleanu, Nicolae Bogdan and Panageas, Stavros and Yu, Jianfeng, Impediments to Financial Trade: Theory and Measurement (January 1, 2015). Fama-Miller Working Paper; Chicago Booth Research Paper No. 15-35. Available at SSRN: https://ssrn.com/abstract=2643593 or http://dx.doi.org/10.2139/ssrn.2643593

Nicolae Bogdan Garleanu

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/garleanu

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stavros Panageas (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jianfeng Yu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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