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

See all articles by Andros Gregoriou

Andros Gregoriou

University of East Anglia

Christos Ioannidis

University of Bath-Department of Economics

Sugata Ghosh

Brunel University London - Economics and Finance

Date Written: June 15, 2009

Abstract

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

Gregoriou, Andros and Ioannidis, Christos and Ghosh, Sugata, Heterogeneous Time Varying Transaction Costs and Asset Pricing in International Equity Markets (June 15, 2009). Financial Markets and Portfolio Management, Vol. 23, No. 3, pp. 271-283, 2009, Available at SSRN: https://ssrn.com/abstract=1626344

Andros Gregoriou (Contact Author)

University of East Anglia ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Christos Ioannidis

University of Bath-Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Sugata Ghosh

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

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