Asset Prices and Trading Volume Under Fixed Transactions Costs

Posted: 3 Sep 2004

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Harry Mamaysky

Columbia University - Columbia Business School

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

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Abstract

We propose a dynamic equilibrium model of asset prices and trading volume when agents face fixed transactions costs. We show that even small fixed costs can give rise to large "no-trade" regions for each agent's optimal trading policy. The inability to trade more frequently reduces the agents' asset demand and in equilibrium gives rise to a significant illiquidity discount in asset prices.

Suggested Citation

Lo, Andrew W. and Mamaysky, Harry and Wang, Jiang, Asset Prices and Trading Volume Under Fixed Transactions Costs. Journal of Political Economy, Vol. 112, pp. 1054-1090, October 2004. Available at SSRN: https://ssrn.com/abstract=585768

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Harry Mamaysky

Columbia University - Columbia Business School ( email )

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Jiang Wang (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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China Academy of Financial Research (CAFR)

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National Bureau of Economic Research (NBER)

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