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

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Description/Abstract

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

Item Type: Article
ISSNs: 1544-6123 (print)
Organisations: Southampton Business School
ePrint ID: 405512
Date :
Date Event
3 February 2017Accepted/In Press
Date Deposited: 06 Feb 2017 14:05
Last Modified: 17 Apr 2017 00:22
Further Information:Google Scholar
URI: http://eprints.soton.ac.uk/id/eprint/405512

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