Trading Costs and Informational Efficiency
79 Pages Posted: 15 May 2017 Last revised: 9 Sep 2020
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Trading Costs and Informational Efficiency
Trading Costs and Informational Efficiency
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: Suggested Citation