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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2012/12:
Costs and Benefits of Speculation

Terje Lensberg (), Klaus Reiner Schenk-Hoppé () and Dan Ladley ()

Abstract: We quantify the effects of financial regulation in an equilibrium model with delegated portfolio management. Fund managers trade stocks and bonds in an order-driven market, subject to transaction taxes and constraints on short-selling and leverage. Results are obtained on the equilibrium properties of portfolio choice, trading activity, market quality and price dynamics under the different regulations. We find that short- sale restrictions reduce short-term volatility and long swings in asset prices, while transaction taxes do more harm than good.

Keywords: Financial regulation; portfolio management; market microstructure; (follow links to similar papers)

JEL-Codes: C63; D53; G18; (follow links to similar papers)

47 pages, October 31, 2012

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