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Transaction costs and asset prices : a dynamic equilibrium model

Vayanos, Dimitri (1998) Transaction costs and asset prices : a dynamic equilibrium model. Review of Financial Studies, 11 (1). pp. 1-58. ISSN 1465-7368

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In this article we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with a riskless, liquid bond, and many risky stocks carrying proportional transaction costs. We obtain stock prices and turnover in closed form. Surprisingly, a stock's price may increase in transaction costs, and a more frequently traded stock may be less adversely affected by an increase in transaction costs. Calculations based on the 'marginal' investor overestimate the effects of transaction costs. For realistic parameter values, transaction costs have very small effects on stock prices but large effects on turnover.

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Additional Information: This is a pre-copy-editing, author-produced PDF of an article accepted for publication in the Review of financial studies following peer review. The definitive publisher-authenticated version [Vayanos, D. (1998). Transaction costs and asset prices : a dynamic equilibrium model. Review of financial studies 11 (1) pp. 1-58] is available online at: LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL ( of the LSE Research Online website.
Library of Congress subject classification: H Social Sciences > HG Finance
Date Deposited: 09 Nov 2005

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