A Decision Theoretic Approach to Bid-Ask Spreads
AbstractPreorder representation results are applied to a normative valuation theory for dealers setting bid-ask spreads in a dynamic framework. The preorders induced by ask and bid prices of marketed assets should satisfy some axioms in order for prices not to yield arbitrage opportunities to traders and not to be such that assets could have zero demands. In a discrete time dynamic model for marketed assets with comonotone payoffs (e.g. markets for options on an underlying security or bond markets) the price functional at each date is shown to be a Choquet integral of discounted asset payoffs next period. Such Bid-ask spreads amount for inventory risk.
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Bibliographic InfoPaper provided by Universite Aix-Marseille III in its series G.R.E.Q.A.M. with number 97a17.
Length: 28 pages
Date of creation: 1997
Date of revision:
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Postal: G.R.E.Q.A.M., (GROUPE DE RECHERCHE EN ECONOMIE QUANTITATIVE D'AIX MARSEILLE), CENTRE DE VIEILLE CHARITE, 2 RUE DE LA CHARITE, 13002 MARSEILLE.
Web page: http://www.greqam.fr/
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INFORMATION ; PRICING;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- Robert Kast & André Lapied, 2010.
"Dynamically consistent Choquet random walk and real investments,"
- André Lapied & Robert Kast, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers 10-21, LAMETA, Universtiy of Montpellier, revised 2010.
- Alain Chateauneuf & Robert Kast & AndrÃ© Lapied, 2001. "Conditioning Capacities and Choquet Integrals: The Role of Comonotony," Theory and Decision, Springer, vol. 51(2), pages 367-386, December.
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