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Strategic trading with transaction cost in the long run

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  • Zhou, Deqing

Abstract

Based on Holden and Subrahmanyam (1994), this work examines how the transaction cost imposed on insiders affects the strategic trading and the consequences. We find that with transaction cost, insiders refrain their trading and prices are less efficient in reflecting the private information. Interestingly, the noise traders’ losses increase with the insiders’ transaction cost when insiders are either competitive or risk averse, since the transaction cost can soften the competition among insiders and can change insiders’ risk-sharing allocation across periods.

Suggested Citation

  • Zhou, Deqing, 2020. "Strategic trading with transaction cost in the long run," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318306202
    DOI: 10.1016/j.frl.2018.12.035
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    References listed on IDEAS

    as
    1. Nicolae Gârleanu & Lasse Heje Pedersen, 2013. "Dynamic Trading with Predictable Returns and Transaction Costs," Journal of Finance, American Finance Association, vol. 68(6), pages 2309-2340, December.
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    3. Chong, Zhiwei, 2012. "Rational expectations equilibrium with transaction costs in financial markets," Finance Research Letters, Elsevier, vol. 9(2), pages 73-80.
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    5. DeMiguel, Victor & Martín-Utrera, Alberto & Nogales, Francisco J., 2015. "Parameter Uncertainty in Multiperiod Portfolio Optimization with Transaction Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(6), pages 1443-1471, December.
    6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    7. Holden, Craig W. & Subrahmanyam, Avanidhar, 1994. "Risk aversion, imperfect competition, and long-lived information," Economics Letters, Elsevier, vol. 44(1-2), pages 181-190.
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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