Trading Costs and Informational Efficiency

79 Pages Posted: 15 May 2017 Last revised: 9 Sep 2020

See all articles by Eduardo Davila

Eduardo Davila

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Cecilia Parlatore

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex-ante identical: price informativeness is independent of the level of trading costs. When investors are ex-ante heterogeneous, a change in trading costs can increase or decrease price informativeness, depending on the source of heterogeneity. Our results are valid under quadratic, linear, and fixed costs. Through a reduction in information acquisition, trading costs reduce price informativeness. We discuss how our results inform the policy debate on financial transaction taxes/Tobin taxes.

Keywords: learning, trading costs, information aggregation, information acquisition, financial transaction taxes

JEL Classification: D82, D83, G14

Suggested Citation

Davila, Eduardo and Parlatore, Cecilia, Trading Costs and Informational Efficiency (May 2020). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2967774

Eduardo Davila (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Cecilia Parlatore

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://www.ceciliaparlatore.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
192
Abstract Views
1,199
Rank
247,366
PlumX Metrics