Will the True Marginal Investor Please Stand Up?: Asset Prices with Immutable Security Trading by Investors

UNSW School of Banking and Finance Working Paper

28 Pages Posted: 16 Feb 2002

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: February 11, 2002

Abstract

The important and highly influential Amihud and Mendelson (1986) model of asset pricing incorporating immutable security trading by a continuum of investors/traders is unnecessarily opaque because of a flaw in the numerical simulation which I correct. Moreover, the exposition by Kane (1994) and Bodie, Kane and Marcus (2002) also fails to faithfully present the model. Putting aside these presentational issues, I show that the model is flawed because the marginal investor, on whom the analysis rests, cannot be identified. More fundamentally, the model fails to identify the benefits of trading whilst taking account of the costs. This one-sided treatment means that the model as it stands cannot be used to make valid predictions of the impact of transaction costs on asset prices.

Keywords: asset pricing, liquidity, security trading, transactions cost, trading benefits

JEL Classification: G120, G110, G200

Suggested Citation

Swan, Peter Lawrence, Will the True Marginal Investor Please Stand Up?: Asset Prices with Immutable Security Trading by Investors (February 11, 2002). UNSW School of Banking and Finance Working Paper, Available at SSRN: https://ssrn.com/abstract=300580 or http://dx.doi.org/10.2139/ssrn.300580

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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