Asset Prices and Trading Volume Under Fixed Transactions Costs

EFA 2001 Barcelona Meetings; Yale ICF Working Paper No. 00-35

78 Pages Posted: 7 Jun 2001

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Harry Mamaysky

Columbia University - Columbia Business School

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2001

Abstract

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

Keywords: Asset Pricing, Liquidity, Trading Volume, Transaction Costs

JEL Classification: G12

Suggested Citation

Lo, Andrew W. and Mamaysky, Harry and Wang, Jiang, Asset Prices and Trading Volume Under Fixed Transactions Costs (May 2001). EFA 2001 Barcelona Meetings; Yale ICF Working Paper No. 00-35. Available at SSRN: https://ssrn.com/abstract=270733 or http://dx.doi.org/10.2139/ssrn.270733

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Harry Mamaysky (Contact Author)

Columbia University - Columbia Business School ( email )

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New York, NY 10027
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Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E62-614
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Cambridge, MA 02142
United States
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617-258-6855 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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