A Transaction Costs Approach to Financial Assets Rates of Return

Abstract

This paper expands on the extent of the gap between how academic teaching view market transactions and how the market professionals actually work, offering a sensible way of closing as much as possible such a gap. Firstly, transaction costs will be analysed from both the demand and supply sides of securities trading, featuring the essential role intermediaries usually performs. This analysis lead us to a careful survey of the structure of the transaction costs function, bearing in mind that different users meet different cost items. Next, the concept and usage of differential rates will be set forth, distinguishing the stock from the flow differential rates, in the framework of an innovative approach inclusive of information sets. Afterwards, it is showed that transaction costs can be measured by rates which are differential ones by themselves. This addresses to an explicit transaction costs function, within a multiplicative model of differential rates. Besides, three simple lemmas are proved to give foundations to some statements included in the paper. Finally, some numerical examples are provided to illustrate algorithms and concepts.