Arbitrage with fixed costs and interest rate models
AbstractIn this paper, we start by considering market models with fixed costs; in such a context, we characterize the absence of arbitrage opportunity and we provide pricing rules. We then apply these results to extend some classical interest rate and option pricing models. In particular, we prove that the quite surprising result obtained by Dybvig-Ingersoll-Ross $\left( 1996\right) $, which asserts that, under the assumption of absence of arbitrage, long zero-coupon rates can never fall, is no longer true in models with fixed costs. Models where the long rate follows a diffusion process as in Brennan-Schwartz $\left( 1979\right) $ are no more to be rejected for arbitrage considerations.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0312002.
Date of creation: 05 Dec 2003
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fixed costs; transaction costs; interest rates; long zero- coupon rates; Dybvig-Ingersoll-Ross;
Other versions of this item:
- Jouini, Elyès & Napp, Clotilde, 2006. "Arbitrage with Fixed Costs and Interest Rate Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(04), pages 889-913, December.
- Elyès Jouini & Clotilde Napp, 2006. "Arbitrage with Fixed Costs and Interest Rate Models," Post-Print halshs-00176496, HAL.
- Clotilde Napp & Elyès Jouini, 2006. "Arbitrage with fixed costs and interest rate models," Post-Print halshs-00151556, HAL.
- G - Financial Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-12-07 (All new papers)
- NEP-CFN-2003-12-07 (Corporate Finance)
- NEP-FIN-2003-12-07 (Finance)
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