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research articles : Local martingales, arbitrage, and viability

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Author Info
Mark Loewenstein (John M. Olin School of Business, Washington University in Saint Louis, Campus Box 1133, One Brookings Drive, St. Louis, MO 63130-4899, USA)
Gregory A. Willard () (Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, E52-431, Cambridge, MA 02142, USA)
Abstract

We revisit a standard model of security prices as Ito processes, and provide some new economic insights about the role of arbitrage and credit limits within such a model. We show that the standard assumptions of a positive state prices and existence of an equivalent martingale measure exclude prices that are viable models of competitive equilibrium and that are potentially useful for modeling actual financial markets. These models have been dismissed in the past as allowing arbitrage, but in fact an agent who prefers more to less and who has limited access to credit may have an optimum.

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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 16 (2000)
Issue (Month): 1 ()
Pages: 135-161
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Handle: RePEc:spr:joecth:v:16:y:2000:i:1:p:135-161

Note: Received: June 9, 1999; revised version: October 4, 1999
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Related research
Keywords: Arbitrage; Viability; Wealth constraints; Continuous-time financial markets; Equivalent martingale measures.;

Find related papers by JEL classification:
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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This page was last updated on 2009-12-30.


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