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Price Functionals with Bid-Ask Spreads: An Axiomatic Approach

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Elyès Jouini

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Abstract

In Jouini and Kallal (1995a), the authors characterized the absence of arbitrage opportunities for contingent claims with cash delivery in the presence of bid-ask spreads. Other authors obtained similar results for a more general definition of the contingent claims but assuming some specific price processes and transaction costs rather than bid-ask spreads in general see for instance, Cvitanic and Karatzas, 1996). The main difference consists in the fact that the bid-ask ratio is constant in this last reference. This assumption does not permit to encompass situations where the prices are determined by the buying and selling limit orders or by a (resp. competitive) specialist (resp. market-makers). We derive in this paper some implications from the no-arbitrage assumption on the price functionals that generalizes all the previous results in a very general setting. Indeed, under some minimal assumptions on the price functional, we prove that the prices of the contingent claims are necessarily in some minimal interval. This result opens the way to many empirical analyses.

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Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-038.

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Date of creation: May 1999
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Handle: RePEc:fth:nystfi:99-038

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April. [Downloadable!] (restricted)
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  2. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July. [Downloadable!] (restricted)
  3. Elyès Jouini, 2003. "Market imperfections, equilibrium and arbitrage," Finance 0312005, EconWPA. [Downloadable!]
    Other versions:
  4. Elyès Jouini & Hédi Kallal, 1999. "Viability and Equilibrium in Securities Markets with Frictions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-036, New York University, Leonard N. Stern School of Business-. [Downloadable!]
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  5. 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)
  6. Boyle, Phelim P & Vorst, Ton, 1992. " Option Replication in Discrete Time with Transaction Costs," Journal of Finance, American Finance Association, vol. 47(1), pages 271-93, March. [Downloadable!] (restricted)
  7. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley. [Downloadable!]
  8. P, F, Koehl ; H, Pham, . "Sublinear Price Functionals under Portfolio Constraints," Working Papers 97-52, Centre de Recherche en Economie et Statistique. [Downloadable!]
  9. Leland, Hayne E, 1985. " Option Pricing and Replication with Transactions Costs," Journal of Finance, American Finance Association, vol. 40(5), pages 1283-1301, December. [Downloadable!] (restricted)
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  10. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December. [Downloadable!] (restricted)
  11. Jouini Elyes & Kallal Hedi, 1995. "Martingales and Arbitrage in Securities Markets with Transaction Costs," Journal of Economic Theory, Elsevier, vol. 66(1), pages 178-197, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Katsiaryna Kaval & Ilya Molchanov, 2005. "Link-save trading and pricing of contingent claims," Finance 0511017, EconWPA. [Downloadable!]
  2. Borglin, Anders & Flåm, Sjur, 2007. "Rationalizing Constrained Contingent Claims," Working Papers 2007:12, Lund University, Department of Economics. [Downloadable!]
  3. M. Dempster & I. Evstigneev & M. Taksar, 2006. "Asset Pricing and Hedging in Financial Markets with Transaction Costs: An Approach Based on the Von Neumann–Gale Model," Annals of Finance, Springer, vol. 2(4), pages 327-355, October. [Downloadable!] (restricted)
    Other versions:
  4. Alet Roux, 2007. "The fundamental theorem of asset pricing under proportional transaction costs," Quantitative Finance Papers 0710.2758, arXiv.org. [Downloadable!]
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