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The fundamental theorem of asset pricing under transaction costs

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  • Paolo Guasoni
  • Emmanuel Lépinette
  • Miklós Rásonyi

Abstract

This paper proves the fundamental theorem of asset pricing with transaction costs, when bid and ask prices follow locally bounded càdlàg (right-continuous, left-limited) processes. The robust no free lunch with vanishing risk condition (RNFLVR) for simple strategies is equivalent to the existence of a strictly consistent price system (SCPS). This result relies on a new notion of admissibility, which reflects future liquidation opportunities. The RNFLVR condition implies that admissible strategies are predictable processes of finite variation. The Appendix develops an extension of the familiar Stieltjes integral for càdlàg integrands and finite-variation integrators, which is central to modelling transaction costs with discontinuous prices. Copyright Springer-Verlag 2012

Suggested Citation

  • Paolo Guasoni & Emmanuel Lépinette & Miklós Rásonyi, 2012. "The fundamental theorem of asset pricing under transaction costs," Finance and Stochastics, Springer, vol. 16(4), pages 741-777, October.
    • Handle: RePEc:spr:finsto:v:16:y:2012:i:4:p:741-777
    DOI: 10.1007/s00780-012-0185-0
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Arbitrage; Fundamental theorem of asset pricing; Transaction costs; Admissible strategies; Finite variation; 91B28; 62P05; 26A45; 60H05; G12;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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