Abstract
We propose a dynamic equilibrium model of asset prices and trading volume when agents face fixed transactions costs. We show that even small fixed costs can give rise to large "no-trade" regions for each agent's optimal trading policy. The inability to trade more frequently reduces the agents' asset demand and in equilibrium gives rise to a significant illiquidity discount in asset prices.
Full Citation
Journal of Political Economy
vol.
112
,
(January 01, 2004):
1054
-1090
.