The Dynamic Properties of Financial-Market Equilibrium with Trading Fees

We incorporate trading fees into a dynamic, multi-agent general-equilibrium model in which traders optimally decide when to trade. For that purpose, we propose an innovative algorithm that synchronizes the traders. Securities prices are not affected by the payment of the fees itself, but rather by the trade-off between smoothing consumption and smoothing holdings that the traders face. In calibrated examples, the interest rate and welfare decline, while risk premia and volatilities increase with trading fees. Liquidity risk and expected liquidity are priced, leading to deviations from the consumption-CAPM. With trading fees, capital is slow-moving which leads to slow price reversal