The Effects of Transaction Costs on Stock Prices and Trading Volume

Posted: 16 Jul 1998

See all articles by Michael J. Barclay

Michael J. Barclay

University of Rochester - Simon School (Deceased)

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Leslie M. Marx

Duke University - Fuqua School of Business, Economics Group

Abstract

We study the effects of changes in bid-ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex, and stocks that move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is larger when Nasdaq market makers avoid odd-eighth quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs significantly reduce trading volume, but do not have a significant effect on prices.

JEL Classification: G10, G14

Suggested Citation

Barclay, Michael J. and Kandel, Eugene and Marx, Leslie M., The Effects of Transaction Costs on Stock Prices and Trading Volume. Available at SSRN: https://ssrn.com/abstract=87112

Michael J. Barclay

University of Rochester - Simon School (Deceased)

N/A

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Leslie M. Marx (Contact Author)

Duke University - Fuqua School of Business, Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

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