NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Impediments to Financial Trade: Theory and Applications

Nicolae Gârleanu, Stavros Panageas, Jianfeng Yu

NBER Working Paper No. 22697
Issued in September 2016, Revised in September 2016
NBER Program(s):Asset Pricing

We propose a tractable model of an informationally inefficient market featuring non-revealing prices, no noise traders, and general assumptions on preferences and payoff distributions. We show the equivalence between our model and a substantially simpler model whereby investors face distortionary investment taxes depending both on their identity and the asset class. This equivalence allows us to account for such phenomena as under-diversification. We further employ the model to assess approaches to performance evaluation, and find that it provides a theoretical basis for some intuitive practices adopted by finance professionals, such as style analysis.

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Document Object Identifier (DOI): 10.3386/w22697

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