The impact of transaction costs on state-contingent claims mispricing
Restocchi, Valerio, Mcgroarty, Frank, Gerding, Enrico and Johnson, Johnnie (2017) The impact of transaction costs on state-contingent claims mispricing Finance Research Letters
PDF __soton.ac.uk_ude_PersonalFiles_Users_jej_mydocuments_papers_valerio restocchi_Impact of transaction costs_Finance research letters_transaction_costs_FRL.pdf
- Accepted Manuscript
Restricted to Repository staff only until 3 February 2018.
Available under License University of Southampton Accepted Manuscript Licence.
We analyze the impact that transaction costs have on asset mispricing in state-contingent claims markets. In particular, we examine betting markets,in which, it has been argued, transaction costs cause the favorite-longshot
bias, a pricing anomaly analogous to the volatility smile in options markets.By using a heterogeneous agents model, we prove that transaction costs alone cannot cause mispricing. Also, we run agent-based simulations to characterize the response of market prices to increments in transaction costs. We find that transaction costs have a significant impact on market inefficiency, by amplifying existing mispricing both directly, influencing market prices, and indirectly, inducing a non-linear response from the agents
|Organisations:||Southampton Business School|
|Date Deposited:||06 Feb 2017 14:05|
|Last Modified:||17 Apr 2017 00:22|
|Further Information:||Google Scholar|
|RDF:||RDF+N-Triples, RDF+N3, RDF+XML, Browse.|
Actions (login required)