Trading fees and slow-moving capital

Author / Creator

Buss, Adrian, author

Available as

Online

Summary

In some situations, investment capital seems to move slowly towards profitable trades. We develop a model of a financial market in which capital moves slowly simply because there is a proportional ...

In some situations, investment capital seems to move slowly towards profitable trades. We develop a model of a financial market in which capital moves slowly simply because there is a proportional cost to moving capital. We incorporate trading fees in an infinite-horizon dynamic general-equilibrium model in which investors optimally and endogenously decide when and how much to trade. We determine the steady-state equilibrium no-trade zone, study the dynamics of equilibrium trades and prices and compare, for the same shocks, the impulse responses of this model to those of a model in which trading is infrequent because of investor inattention.

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