Consistent price systems and arbitrage opportunities of the second kind in models with transaction costs
AbstractIn contrast with the classical models of frictionless financial markets, market models with proportional transaction costs, even satisfying usual no-arbitrage properties, may admit arbitrage opportunities of the second kind. This means that there are self-financing portfolios with initial endowments lying outside the solvency region but ending inside. Such a phenomenon was discovered by M. RÃ¡sonyi in the discrete-time framework. In this note, we consider a rather abstract continuous-time setting and prove necessary and sufficient conditions for a property which we call no free lunch of the second kind, NFL2. We provide a number of equivalent conditions elucidating, in particular, the financial meaning of the property B which appeared as an indispensable âtechnicalâ hypothesis in previous papers on hedging (superreplication) of contingent claims under transaction costs. We show that it is equivalent to another condition on the ârichnessâ of the set of consistent price systems, close to the condition PCE introduced by RÃ¡sonyi. In the last section, we deduce the RÃ¡sonyi theorem from our general result by using specific features of discrete-time models.
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 16 (2012)
Issue (Month): 1 (January)
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Web page: http://www.springerlink.com/content/101164/
Other versions of this item:
- Lépinette-Denis, Emmanuel & Kabanov, Yuri, 2012. "Consistent Price Systems and Arbitrage Opportunities of the Second Kind in Models with Transaction Costs," Economics Papers from University Paris Dauphine 123456789/4652, Paris Dauphine University.
- Kabanov, Yuri & Lépinette-Denis, Emmanuel, 2012. "Consistent price systems and arbitrage opportunities of the second kind in models with transaction costs," Economics Papers from University Paris Dauphine 123456789/9714, Paris Dauphine University.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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