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Robust no-free lunch with vanishing risk, a continuum of assets and proportional transaction costs

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  • Bruno Bouchard
  • Emmanuel Lepinette
  • Erik Taflin

Abstract

We propose a continuous time model for financial markets with proportional transactions costs and a continuum of risky assets. This is motivated by bond markets in which the continuum of assets corresponds to the continuum of possible maturities. Our framework is well adapted to the study of no-arbitrage properties and related hedging problems. In particular, we extend the Fundamental Theorem of Asset Pricing of Guasoni, R\'asonyi and L\'epinette (2012) which concentrates on the one dimensional case. Namely, we prove that the Robust No Free Lunch with Vanishing Risk assumption is equivalent to the existence of a Strictly Consistent Price System. Interestingly, the presence of transaction costs allows a natural definition of trading strategies and avoids all the technical and un-natural restrictions due to stochastic integration that appear in bond models without friction. We restrict to the case where exchange rates are continuous in time and leave the general c\`adl\`ag case for further studies.

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Paper provided by arXiv.org in its series Papers with number 1302.0361.

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Date of creation: Feb 2013
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Handle: RePEc:arx:papers:1302.0361

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Web page: http://arxiv.org/

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  1. 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.
  2. Tomas Björk & Yuri Kabanov & Wolfgang Runggaldier, 1997. "Bond Market Structure in the Presence of Marked Point Processes," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 7(2), pages 211-239.
  3. Emmanuel Denis & Yuri Kabanov, 2012. "Consistent price systems and arbitrage opportunities of the second kind in models with transaction costs," Finance and Stochastics, Springer, vol. 16(1), pages 135-154, January.
  4. Rene Carmona & Michael Tehranchi, 2004. "A Characterization of Hedging Portfolios for Interest Rate Contingent Claims," Papers math/0407119, arXiv.org.
  5. Ivar Ekeland & Erik Taflin, 2003. "A theory of bond portfolios," Papers math/0301278, arXiv.org, revised May 2005.
  6. Ekeland, Ivar & Taflin, Erik, 2005. "A theory of bond portfolios," Economics Papers from University Paris Dauphine 123456789/6041, Paris Dauphine University.
  7. Campi, Luciano & Schachermayer, Walter, 2006. "A super-replication theorem in Kabanov’s model of transaction costs," Economics Papers from University Paris Dauphine 123456789/5455, Paris Dauphine University.
  8. Julien Grépat & Yuri Kabanov, 2012. "Small transaction costs, absence of arbitrage and consistent price systems," Finance and Stochastics, Springer, vol. 16(3), pages 357-368, July.
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