When Is the Transaction Cost Optimal?

39 Pages Posted: 22 Aug 2018

See all articles by Akira Yamazaki

Akira Yamazaki

Hosei University - Graduate School of Business Administration

Daisuke Yoshikawa

Hokkai-Gakuen University

Date Written: August 10, 2018

Abstract

Transaction costs play a significant role in financial markets, and many studies have been conducted on this topic to date. Research on this topic may be divided into two categories. The first category of studies examines the optimal trading strategy of the investor who has to pay transaction costs. The second group investigates the optimal transaction costs that ensure the market operates as smoothly as possible, while retaining the profits of the market maker. We consider simultaneous optimization by the investor and the market maker, and analyse the impact of market parameters on the optimized transaction costs. As the answer of the simultaneous optimization, we could show the optimal transaction cost exists, when the market maker decides to make the market for sufficiently long term. Further, we also derive the fact that the optimal transaction cost increases when the market is profitable for investors, but it decreases when the opposite situation appears.

Keywords: Transaction costs; Optimal trading strategy; Investor; Market maker

JEL Classification: G10: G11; G14

Suggested Citation

Yamazaki, Akira and Yoshikawa, Daisuke, When Is the Transaction Cost Optimal? (August 10, 2018). Available at SSRN: https://ssrn.com/abstract=3229745 or http://dx.doi.org/10.2139/ssrn.3229745

Akira Yamazaki

Hosei University - Graduate School of Business Administration ( email )

Japan

Daisuke Yoshikawa (Contact Author)

Hokkai-Gakuen University ( email )

4-1-40, Asahi-machi, Toyohira-ku
Sapporo-shi
Hokkai-do, 062-8605
Japan

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