Impediments to Financial Trade: Theory and Applications

45 Pages Posted: 3 Oct 2016 Last revised: 6 Jan 2025

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 California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: September 2016

Abstract

We propose a tractable model of an informationally inefficient market featuring non-revealing prices, no noise traders, and general assumptions on preferences and payoff distributions. We show the equivalence between our model and a substantially simpler model whereby investors face distortionary investment taxes depending both on their identity and the asset class. This equivalence allows us to account for such phenomena as under-diversification. We further employ the model to assess approaches to performance evaluation, and find that it provides a theoretical basis for some intuitive practices adopted by finance professionals, such as style analysis.

Suggested Citation

Garleanu, Nicolae Bogdan and Panageas, Stavros and Yu, Jianfeng, Impediments to Financial Trade: Theory and Applications (September 2016). NBER Working Paper No. w22697, Available at SSRN: https://ssrn.com/abstract=2846933

Nicolae Bogdan Garleanu (Contact Author)

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

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

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Stavros Panageas

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Jianfeng Yu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

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