Trading Cost and Informational Efficiency

61 Pages Posted: 15 May 2017  

Eduardo Davila

New York University (NYU)

Cecilia Parlatore

New York University (NYU) - Leonard N. Stern School of Business

Date Written: April 2017

Abstract

​We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex-ante identical: price informativeness is independent of the level of trading costs. This result holds for quadratic, linear, and fixed trading costs in competitive and strategic environments. When investors are ex-ante heterogeneous, trading costs reduce (increase) price informativeness if and only if investors who disproportionately trade on information are more (less) elastic than investors who mostly trade on hedging. Through a reduction in information acquisition, trading costs reduce price informativeness.

Keywords: learning, trading costs, information aggregation, information acquisition, financial transaction taxes

Suggested Citation

Davila, Eduardo and Parlatore, Cecilia, Trading Cost and Informational Efficiency (April 2017). NYU Working Paper No. 2451/38631. Available at SSRN: https://ssrn.com/abstract=2967774

Eduardo Davila (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Cecilia Parlatore

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://www.ceciliaparlatore.com

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