Abstract
This paper uses a simple model of mean-variance capital markets equilibrium with proportional transactions costs to analyze the competition of stock markets for investors. We assume that equity trading is costly and endogenize transactions costs as variables strategically influenced by stock exchanges. Among other things, the model predicts that increasing financial market correlation leads to a decrease of transaction costs, an increase in cross-border trading activity, and to a decrease in the home bias of international equity flows. These predictions are consistent with the recent evolution of international stock markets.
Highlights
The objective of this paper is to analyze the competition between stock exchanges in the framework of asset pricing theory
We do this by considering a simple mean-variance capital market equilibrium model with transactions costs and by endogenizing the transactions costs as variables strategically influenced by stock exchanges
We further find that equilibrium fees depend negatively on exogenous trading costs
Summary
The objective of this paper is to analyze the competition between stock exchanges in the framework of asset pricing theory. The model predicts that transactions costs adjust to accommodate the decreased hedging demand of investors, which in turn stimulates crossborder portfolio investment As we show, this indirect effect dominates the direct effect, leading to an overall increase in trading volumes and to an erosion of the home bias, without, fully eliminating it. An example of a prediction of our theory that demonstrates the need for a careful analysis is that decreasing transactions costs can lead to decreasing or increasing stock prices.[6] Second, we consider other determinants of market activity and stock exchange competition beyond intermediation costs, such as market correlation, volatility, or the distribution of asset holdings These factors are at least as important as cost factors and are relevant for general equilibrium considerations. The appendix contains a table with data on the international home bias
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
