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Arbitrage Equilibrium with Transaction Costs

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  • Niehans, Jurg

Abstract

The general topic of this paper is the transmission of disturbances in asset markets. The specific topic is the role of transaction costs in this transmission. Do high transaction costs shelter a market against foreign disturbances while 'bottling up' domestic disturbances at home? The question is considered in the context of a small-scale general equilibrium model of asset arbitrage with quadratic transaction cost functions. The main conclusion is that the transmission of (disturbances depends more on the relationships between different transaction cost rates than on their absolute level. A progressive decline of transaction costs, therefore, does not necessarily strengthen the transmission of disturbances, nor can artificial increases of transaction costs be relied upon to reduce it. Copyright 1994 by Ohio State University Press.

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  • Niehans, Jurg, 1994. "Arbitrage Equilibrium with Transaction Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 249-270, May.
    • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:2:p:249-70
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    Cited by:

    1. Christopher Green, 1998. "Banks as Interest Rate Managers," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(3), pages 189-208, December.
    2. Pippenger, John, 2003. "Modeling foreign exchange intervention: stock versus stock adjustment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 137-156, April.
    3. Kramer, Charles, 1999. "Noise trading, transaction costs, and the relationship of stock returns and trading volume," International Review of Economics & Finance, Elsevier, vol. 8(4), pages 343-362, November.

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