Transaction Costs in a Model of Capital Market Equilibrium

This paper analyzes a simple mean-variance model of an imperfect capital market in which trade in assets involves costs. Fixed transactions costs, which result in investors only partially diversifying their portfolios, are shown to imply equilibrium asset prices substantially different from the Shar...

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Bibliographic Details
Published in:The Journal of political economy 1979-08, Vol.87 (4), p.673-700
Main Author: Mayshar, Joram
Format: Article
Language:English
Subjects:
Capital assets
Capital markets
Cost efficiency
Costs
Economic models
Economic theory
Financial portfolios
Fixed costs
Investors
Market equilibrium
Political economy
Portfolio investments
Trade
Transaction costs
Transactions
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Summary:This paper analyzes a simple mean-variance model of an imperfect capital market in which trade in assets involves costs. Fixed transactions costs, which result in investors only partially diversifying their portfolios, are shown to imply equilibrium asset prices substantially different from the Sharpe-Lintner prices. An improvement in the markets, in the form of lowering the trading costs, is shown to result in an increase in the number of assets held by each investor, in lowering equilibrium risk premia, and also in increasing the number of active investors.
ISSN:0022-3808
1537-534X
DOI:10.1086/260788