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Transaction costs and informational cascades in financial markets
[journal article]
Abstract "We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We implement a financial market with sequential trading and transaction costs in the laboratory. According to theory, eventually al... view more
"We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We implement a financial market with sequential trading and transaction costs in the laboratory. According to theory, eventually all traders neglect their private information and abstain from trading (i.e., a no-trade informational cascade occurs). We find that, in the experiment, informational no-trade cascades occur when theory predicts they should (i.e., when the trade imbalance is sufficiently high). At the same time, the proportion of subjects irrationally trading against their private information is smaller than in a financial market without transaction costs. As a result, the overall efficiency of the market is not significantly affected by the presence of transaction costs." [author's abstract]... view less
Classification
National Economy
Document language
English
Publication Year
2008
Page/Pages
p. 581-592
Journal
Journal of Economic Behavior & Organization, 68 (2008) 3-4
DOI
https://doi.org/10.1016/j.jebo.2008.08.001
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)