Martingales and arbitrage in securities markets with transaction costs

Kallal, Hedi; Jouini, Elyès

Kallal, Hedi; Jouini, Elyès (1995), Martingales and arbitrage in securities markets with transaction costs, Journal of Economic Theory, 66, 1, p. 178-197. http://dx.doi.org/10.1006/jeth.1995.1037

Type

Article accepté pour publication ou publié

Date

1995-06

Journal name

Journal of Economic Theory

Volume

Number

Publisher

Elsevier

Pages

178-197

Abstract (EN)

We derive the implications from the absence of arbitrage in dynamic securities markets with bid-ask spreads. The absence of arbitrage is equivalent to the existence of at least an equivalent probability measure that transforms some process between the bid and the ask price processes of traded securities into a martingale. The martingale measures can be interpreted as possible linear pricing rules and can be used to determine the investment opportunities available in such an economy. The minimum cost at which a contingent claim can be obtained through securities trading is its largest expected value with respect to the martingale measures.

Subjects / Keywords

Investment; linear pricing rules; bid-ask spreads

JEL

G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading Volume; Bond Interest Rates
G13 - Contingent Pricing; Futures Pricing
D52 - Incomplete Markets
D90 - General