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Arbitrage in markets with bid-ask spreads

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  • Przemysław Rola

Abstract

In this paper a finite discrete time market model with bid-ask spreads and a money account is considered in the setting of an arbitrary state space. The notions of an equivalent bid-ask martingale measure (EBAMM) and of supermartingale as well as submartingale consistent price systems are introduced. The fundamental theorem of asset pricing is proved using EBAMM as an equivalent condition for no-arbitrage. The Cox-Ross-Rubinstein model with bid-ask spreads is presented as an application of our results. Copyright The Author(s) 2015

Suggested Citation

  • Przemysław Rola, 2015. "Arbitrage in markets with bid-ask spreads," Annals of Finance, Springer, vol. 11(3), pages 453-475, November.
    • Handle: RePEc:kap:annfin:v:11:y:2015:i:3:p:453-475
    DOI: 10.1007/s10436-015-0266-0
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    References listed on IDEAS

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    1. Jouini Elyes & Kallal Hedi, 1995. "Martingales and Arbitrage in Securities Markets with Transaction Costs," Journal of Economic Theory, Elsevier, vol. 66(1), pages 178-197, June.
    2. (**), Christophe Stricker & (*), Miklós Rásonyi & Yuri Kabanov, 2002. "No-arbitrage criteria for financial markets with efficient friction," Finance and Stochastics, Springer, vol. 6(3), pages 371-382.
    3. Yuri Kabanov, 2009. "Markets with Transaction Costs. Mathematical Theory," Post-Print hal-00488168, HAL.
    4. Yan Dolinsky & H. Soner, 2014. "Robust hedging with proportional transaction costs," Finance and Stochastics, Springer, vol. 18(2), pages 327-347, April.
    5. repec:dau:papers:123456789/5630 is not listed on IDEAS
    6. Walter Schachermayer, 2004. "The Fundamental Theorem of Asset Pricing under Proportional Transaction Costs in Finite Discrete Time," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 19-48, January.
    7. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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    Cited by:

    1. Dilip B. Madan, 2016. "Benchmarking in two price financial markets," Annals of Finance, Springer, vol. 12(2), pages 201-219, May.
    2. Martin Brown & Tomasz Zastawniak, 2020. "Fundamental Theorem of Asset Pricing under fixed and proportional transaction costs," Annals of Finance, Springer, vol. 16(3), pages 423-433, September.

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    More about this item

    Keywords

    Arbitrage; Bid-ask spreads; Consistent price system; Bid-ask martingale measure; G10;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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