Scandinavian Working Papers in Economics

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

No 2012/12: Costs and Benefits of Speculation

Terje Lensberg (), Klaus Reiner Schenk-Hoppé () and Dan Ladley ()
Additional contact information
Terje Lensberg: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Klaus Reiner Schenk-Hoppé: Leeds University Business School and School of Mathematics, University of Leeds, and Dept. of Finance and Management Science, NHH Norwegian School of Economics, Postal: University of Leeds, Leeds University Business School and School of Mathematics, Leeds LS2 9JT, UK
Dan Ladley: Dept. of Economics, University of Leicester, Postal: University of Leicester, Dept. of Economics, University of Leicester,, Leicester, LE1 7RH, UK

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

JEL-codes: C63; D53; G18

47 pages, October 31, 2012

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