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Duality and arbitrage with transactions costs: theory and applications

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  • Michael J. Stutzer

Abstract

Recent advances in duality theory have made it easier to discover relationships between asset prices and the portfolio choices based on them. But this approach to arbitrage-free securities markets has yet to be extended and applied to economies with transactions costs. This paper does so, within the context of a general state-preference model of securities markets. Several applications are developed to illustrate the nature of the theory and its potential to resolve a host of issues surrounding the effects of transactions costs on securities markets.

Suggested Citation

  • Michael J. Stutzer, 1989. "Duality and arbitrage with transactions costs: theory and applications," Staff Report 128, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:128
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    References listed on IDEAS

    as
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    4. Dothan, Michael U., 1990. "Prices in Financial Markets," OUP Catalogue, Oxford University Press, number 9780195053128.
    5. Green, Richard C & Srivastava, Sanjay, 1985. "Risk Aversion and Arbitrage," Journal of Finance, American Finance Association, vol. 40(1), pages 257-268, March.
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    Keywords

    Asset-liability management; Arbitrage;

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