Heterogeneous Time Varying Transaction Costs and Asset Pricing in International Equity Markets
Financial Markets and Portfolio Management, Vol. 23, No. 3, pp. 271-283, 2009
Posted: 19 Jun 2010
Date Written: June 15, 2009
In this paper, we examine the time variation in transaction costs relative to excess returns, in a panel consisting of 10 international equity indices over the time period 1984–2005. This is undertaken by extending the consumption CAPM (CCAPM) model proposed by Campbell and Shiller (Rev. Financ. Stud. 1:195–228, 1988) to incorporate time varying proportional transaction costs. We rigorously address both the cross-country heterogeneity in the estimated model and endogeneity. We find strong evidence that suggests transaction costs should be included as an additional explanatory variable in the CCAPM. This leads to the conclusion that transaction costs should be included in asset pricing models as their stochastic process impacts directly on private consumption expenditure.
Keywords: Asset pricing, Bid-ask spreads, Heterogeneity, GMM
JEL Classification: C23, G12
Suggested Citation: Suggested Citation