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Working paper

Transaction costs, liquidity and expected returns at the Berlin Stock Exchange, 1892-1913

Research on Collective Goods Preprint Series. Max-Planck-Institute, 2010. No. 20.
Gelman S. V.
We estimate effective spreads and  round-trip  transaction   costs   at   the   Berlin   Stock   Exchange  for the period  1892 - 1913  using daily  stock  market  returns  for a sample of 27  stocks . Our results show that  transaction   costs  at the main  stock   exchange  in a bank-based financial system at the turn of the 20th century were quite low  and  about comparable to  transaction   costs  in modern markets. Nonetheless, transaction costs varied substantially over time and across securities, whereby the cross-sectional variation could be substantially explained by firm size and time variation by crises. Furthermore, we find surprising evidence that transaction costs decrease the  expected  excess  returns . Thereby size and momentum premia are of expected signs while market beta has no significant influence on the cross-sectional return variation.