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Viable Costs and Equilibrium Prices in Frictional Securities Markets

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  • Zhiwu Chen

    (Yale University School of Management)

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    Abstract

    This paper studies security markets with trading frictions, and offers a complete characterization of viable convex cost systems. For frictional markets that give rise to a convex-cone traded-payoff span and a sublinear payoff cost functional, the following three conditions are equivalent: viability, the extension property, and the absence of free lunches. Special cases in this class of markets include perfect-markets economies [Harrison and Kreps (1979)], economies with proportional transaction costs [Jouini and Kallal (1992, 1995)], economies with solvency constraints [Hindy (1995)], economies with no-short-selling, and economies with any combination of these frictions.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 2 (2001)
    Issue (Month): 2 (November)
    Pages: 297-323

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    Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:297-323

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    Related research

    Keywords: Frictional markets; Viable price system; No arbitrage; Free lunches; Sublinear price functional; Market frictions;

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    1. He, Hua & Pearson, Neil D., 1991. "Consumption and portfolio policies with incomplete markets and short-sale constraints: The infinite dimensional case," Journal of Economic Theory, Elsevier, Elsevier, vol. 54(2), pages 259-304, August.
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    Cited by:
    1. Arturo Bris & William N. Goetzmann & Ning Zhu, 2007. "Efficiency and the Bear: Short Sales and Markets Around the World," Journal of Finance, American Finance Association, American Finance Association, vol. 62(3), pages 1029-1079, 06.

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