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The Asset Pricing Effects of Fixed Holding Costs: An Upper Bound

Published online by Cambridge University Press:  06 April 2009

Alan D. Viard
Affiliation:
Department of Economics, Ohio State University, Columbus, OH 43210–1172.

Abstract

The Capital Asset Pricing Model predicts that investors will hold diversified portfolios, but many households actually hold very few assets. The paper examines the asset pricing implications of one possible explanation for this phenomenon, fixed costs of holding assets. While earlier authors found the exact asset pricing effects of such costs in single-period models under restrictive assumptions, I derive a general upper bound on these effects that is also valid in continuous time. Illustrative calculations reveal that large holding costs must be postulated to generate significant asset pricing effects.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1995

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