Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7352265 | Finance Research Letters | 2017 | 5 Pages |
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 character- ize 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.
Related Topics
Social Sciences and Humanities
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Economics and Econometrics
Authors
Valerio Restocchi, Frank McGroarty, Enrico Gerding, Johnnie E.V. Johnson,