Costs and benefits of speculation

We quantify the effects of financial regulation in a general equilibrium model with market microstructure. Fund managers trade stocks and bonds in an order-driven market, subject to transaction taxes and constraints on short-selling and leverage. Results are obtained on the equilibrium properties of portfolio choice, trading activity, market quality and price dynamics under the different regulations. We find that these measures may neither be as beneficial as some politicians believe nor as damaging as many practitioners fear. Financial regulation ; portfolio management ; market microstructure ; business cycles