Discussion paper
DP10737 Trading Fees and Slow-Moving Capital
In some situations, investment capital seems to move slowly towards profitable
trades. We develop a model of a financial market in which capital moves slowly simply
because there is a proportional cost to moving capital. We incorporate trading fees
in an infinite-horizon dynamic general-equilibrium model in which investors optimally
and endogenously decide when and how much to trade. We determine the steady-state
equilibrium no-trade zone, study the dynamics of equilibrium trades and prices and
compare, for the same shocks, the impulse responses of this model to those of a model
in which trading is infrequent because of investor inattention.
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