The Dynamic Properties of Financial-Market Equilibrium with Trading Fees
61 Pages Posted: 21 Jun 2013 Last revised: 8 Jul 2013
There are 2 versions of this paper
The Dynamic Properties of Financial-Market Equilibrium with Trading Fees
Financial-Market Equilibrium with Friction
Date Written: June 2013
Abstract
We incorporate trading fees in a long-horizon dynamic general-equilibrium model in which traders optimally and endogenously decide when and how much to trade. A full characterization of equilibrium is provided, which allows us to study the dynamics of equilibrium trades, equilibrium asset prices and rates of return in the presence of trading fees. We exhibit the effect of trading fees on deviations from the consumption- CAPM and analyze the pricing of endogenous liquidity risk. We compare, for the same shocks, the impulse responses of this model to those of a model in which trading is infrequent because of trader inattention.
Suggested Citation: Suggested Citation