The Effects of Transaction Costs on Households' Financial Asset Demands

Abstract

Changes in risk-adjusted, expected, relative rates of return on financial assets signal rebalancing trades to financial asset owners. Transaction costs reduce the number and frequency of these trades below what they would be if trading costs were smaller or nonexistent. By not trading, households incur implicit costs of holding poorly diversified portfolios. These costs range from $4 billion per year, 0.28 percent of wealth, to & billion per year, 1.6 percent of wealth. The costs of not trading depend on the variability of relative rates of return and the interest elasticities of asset demands. Copyright 1991 by Ohio State University Press.