THE EFFECTS OF VARIABLE AND FIXED TRANSACTION COSTS ON OPTIMAL INVESTMENT DECISIONS

Rafael Lazimy*, Haim Levy

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This paper studies the impact of variable and fixed transaction costs on investment decisions under conditions of risk. The decision model is first formulated as a mixed‐integer nonlinear program. The following subjects are then examined: the structure of the investment frontier facing the investor and the effects of transaction costs on this frontier, the impact of transaction costs on the investor's optimal investment strategy, and the conditions for the equilibrium structure of risky asset prices and risk‐return relationships. The main finding is that the relaxation of the assumption of the absence of transaction costs eliminates some of the most unattractive implications of the classic capital asset pricing model (CAPM) while preserving the more attractive implications of this model. Also, our model provides explanations for some discrepancies between the theoretical CAPM and empirical findings and, therefore, is a step toward narrowing the gap between theory and practice.

Original languageEnglish
Pages (from-to)527-545
Number of pages19
JournalDecision Sciences
Volume14
Issue number4
DOIs
StatePublished - Oct 1983

Keywords

  • Capital Asset Pricing Model
  • Economic Analysis
  • Portfolio Analysis

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