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THE EFFECTS OF VARIABLE AND FIXED TRANSACTION COSTS ON OPTIMAL INVESTMENT DECISIONS
Author(s) -
Lazimy Rafael,
Levy Haim
Publication year - 1983
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1983.tb00204.x
Subject(s) - transaction cost , capital asset pricing model , economics , investment (military) , microeconomics , fixed cost , variable (mathematics) , efficient frontier , risk–return spectrum , asset (computer security) , variable cost , econometrics , database transaction , financial economics , computer science , mathematics , portfolio , mathematical analysis , computer security , politics , political science , law , programming language
This paper studies the impact of variable and fixed transaction costs on investment decisions under conditions of risk. The decision model is first formulated as a mixed‐integer nonlinear program. The following subjects are then examined: the structure of the investment frontier facing the investor and the effects of transaction costs on this frontier, the impact of transaction costs on the investor's optimal investment strategy, and the conditions for the equilibrium structure of risky asset prices and risk‐return relationships. The main finding is that the relaxation of the assumption of the absence of transaction costs eliminates some of the most unattractive implications of the classic capital asset pricing model (CAPM) while preserving the more attractive implications of this model. Also, our model provides explanations for some discrepancies between the theoretical CAPM and empirical findings and, therefore, is a step toward narrowing the gap between theory and practice.