Asset Prices, Trading Volumes, and Investor Welfare in Markets with Transaction Costs

Abstract

In a model of asset markets with transaction costs, we find a sufcient condition for an increase in transaction costs to increase buying prices, decrease selling prices, decrease the trading volume, and make all active investors worse off. The sufficient condition is met by all CARA utility functions. As for CRRA utility functions, it is met if and only if CRRA coefficients are less than or equal to one. We show that whenever some investor has a CRRA coefficient greater than one, an increase in transaction costs may well decrease buying prices and make buyers better off.