NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Trading Costs and Informational Efficiency

Eduardo Dávila, Cecilia Parlatore

NBER Working Paper No. 25662
Issued in March 2019
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, International Finance and Macroeconomics

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, anything goes, and 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.

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Document Object Identifier (DOI): 10.3386/w25662

 
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