Transaction Costs and Asset Valuation

Abstract

We suggest the method of evaluation of illiquid assets on the market in the presence of proportional transaction costs by using two consumption/investment models. We study an investor's implicit evaluation of an illiquid asset whose trading incurs a proportional transaction cost. We show that the investor assigns an implicit value between the bid and ask price and uses it for his investment and/or consumption decisions. We also show that the implicit value is an increasing function of the investor's liquidity ratio, which is a measure of liquidity of the investor's asset holdings.

Citation

Jang, B., Keun Koo, H. and Jin Choi, U. (2004), "Transaction Costs and Asset Valuation", Review of Accounting and Finance, Vol. 3 No. 4, pp. 99-111. https://doi.org/10.1108/eb043415