Financial Market Frictions

DeGennaro, Ramon P. and Cesare Robotti. “Financial Market Frictions.” Economic Review 92 (2007), Number 3, 1-16.

16 Pages Posted: 6 Feb 2021

See all articles by Ramon P. DeGennaro

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Cesare Robotti

Warwick Business School

Date Written: May 27, 2007

Abstract

What is a market friction? In the context of the capital asset pricing model, this article defines a financial market friction as anything that interferes with trade. This interference includes two dimensions. First, financial market frictions cause a market participant to deviate from holding the market portfolio. By implication, these frictions can cause a market participant to be exposed to more or less risk than she might prefer. This definition at first seems very limited but is, in fact, only as limited as the definition of the market portfolio. In this article, the term market portfolio means not only financial assets but also real estate, human capital, investors’ time, and so on. Put differently and somewhat less obscurely, financial market frictions generate costs that interfere with trades that rational individuals make (or would make in the absence of market frictions).

Keywords: market frictions, transactions costs

JEL Classification: G10, G20

Suggested Citation

DeGennaro, Ramon P. and Robotti, Cesare, Financial Market Frictions (May 27, 2007). DeGennaro, Ramon P. and Cesare Robotti. “Financial Market Frictions.” Economic Review 92 (2007), Number 3, 1-16., Available at SSRN: https://ssrn.com/abstract=3738764

Ramon P. DeGennaro (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

Cesare Robotti

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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