Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

Do fewer transaction costs and higher liquidity relate to lower market prices? Are there any good resources that deal with these topics in more detail?

share|improve this question
    
yes, why would they not lead to lower market prices. I assume you mean execution related costs when you say "market prices"? –  Matt Wolf Aug 3 '13 at 2:26
    
Yes exactly. I was just curious if there were good sources that go over the specifics. –  user5846 Aug 3 '13 at 3:04
1  
Google TCA (transaction cost analysis model ) –  Matt Wolf Aug 3 '13 at 6:11
add comment

1 Answer

You are right, "exogeneous transaction costs" (transaction taxes, brokerage fees...) are related to illiquidity sources. In the literature, these costs impact prices because investors require compensation for its cost.

Empirically, liquidity has been helpful to explain some market facts such that the small firm effect, the equity premium puzzle... Loosely speaking if you are interested in good material you have the choice either to study the literature (very large) on market microstructure or the literature on liquidity and asset pricing. In this latter literature, the market is seen as a friction market and illiquidity costs (frictions) are taken into accounts by investors. Then, returns (=prices) are impacted by illiquidity. A very good introduction to this literature is given in : Amihud, Y., Mendelson, H., & Heje Pedersen, L. (2005). Liquidity and Asset Prices . nowpublishers Inc.

Two others references :

Acharya, V., & Pedersen, L. (2005). Asset pricing with liquidity risk. Journal of Financial Economics,

Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of financial Economics, 17.

share|improve this answer
    
Moreover, since a) liquidity change over time and b) liquidity impact returns ; then a+b= liquidity also impact assets volatility. –  Malick Jan 20 at 3:15
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.