Non-linear asset valuation on markets with frictions

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Non-linear asset valuation on markets with frictions

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Waegenaere, A. de
Kast, R.
Lapied, A. (Tilburg University, Center for Economic Research)

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André Lapied

Abstract

This paper provides a non-linear pricing rule for the valuation of assets on financial markets with intermediaries. The non-linearity arises from the fact that dealers charge a price for their intermediation between buyer and seller. The pricing rule we propose is an alternative for the wellknown no-arbitrage pricing on markets without frictions. The price of an asset equals the signed Choquet integral of its discounted payo with respect to a concave signed capacity. We show that this pricing rule is consistent with equilibrium. Furthermore, equilibria are shown to satisfy a notion of constrained Pareto optimality.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 112.

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Date of creation: 1996
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Handle: RePEc:dgr:kubcen:1996112

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Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June. [Downloadable!] (restricted)
repec:cup:cbooks:9780521629560 is not listed on IDEAS
Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier. [Downloadable!] (restricted)
Chateauneuf, A. & Kast, R. & Lapied, A., 1992. "Choquet Pricing for Financial Markets with Frictions," G.R.E.Q.A.M. 92a11, Universite Aix-Marseille III.
Wilson, Charles, 1991. "Incomplete Markets," Working Papers 91-63, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June. [Downloadable!] (restricted)

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De Waegenaere, A. & Wakker, P., 1997. "Choquet integrals with respect to non-monotonic set functions," Discussion Paper 44, Tilburg University, Center for Economic Research. [Downloadable!]

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