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Market imperfections, equilibrium and arbitrage

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Author Info
Elyès Jouini

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Abstract

The theory of asset pricing, which takes its roots in the Arrow-Debreu model (Theory of value [1959, chap. 7]), the Black and Sholes formula (1973) and Cox and Ross (1976 a and b), has been formalized in a general framework by Harrison and Kreps (1979), Harrison and Pliska (1979) and Kreps (1981). In these models, securities markets are assumed to be frictionless. The main result is that a price process is arbitrage free (or, equivalently, compatible with some equilibrium) if and only if it is, when appropriately renormalized, a martingale for some equivalent probability measure. The theory of pricing by arbitrage follows from there. Contingent claims can be priced by taking their expected value with respect to an equivalent martingale measure. If this value is unique, the claim is said to be priced by arbitrage. The new probabilities can be interpreted as state prices (the prices of $1$ dollar tomorrow in each state of the world) or as the intertemporal marginal rates of substitution of an agent maximizing his expected utility. In this work, we will propose a general model that takes frictions into account.

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Paper provided by EconWPA in its series Finance with number 0312005.

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Length: 55 pages
Date of creation: 08 Dec 2003
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Handle: RePEc:wpa:wuwpfi:0312005

Note: Type of Document - pdf; prepared on Win98; pages: 55
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Related research
Keywords: transaction costs; shortsales constraints; frictions; market imperfections; arbitrage; viability; different borrowing and lending rates; borrowing constraints; arbitrage pricing;

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G - Financial Economics

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References listed on IDEAS
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. Philip H. Dybvig, 1987. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Cowles Foundation Discussion Papers 826R, Cowles Foundation, Yale University, revised Jan 1988. [Downloadable!]
    Other versions:
  2. Philip H. Dybvig & Chi-fu Huang, 1988. "Nonnegative Wealth, Absence of Arbitrage, and Feasible Consumption Plans," Cowles Foundation Discussion Papers 860, Cowles Foundation, Yale University. [Downloadable!]
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  3. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September. [Downloadable!] (restricted)
  4. Dybvig, Philip H & Ross, Stephen A, 1982. "Portfolio Efficient Sets," Econometrica, Econometric Society, vol. 50(6), pages 1525-46, November. [Downloadable!] (restricted)
  5. Dybvig, Philip H, 1988. "Distributional Analysis of Portfolio Choice," Journal of Business, University of Chicago Press, vol. 61(3), pages 369-93, July. [Downloadable!] (restricted)
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  6. Aiyagari, S. Rao & Gertler, Mark, 1991. "Asset returns with transactions costs and uninsured individual risk," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 311-331, June. [Downloadable!] (restricted)
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  7. Dybvig, Philip H & Ross, Stephen A, 1986. " Tax Clienteles and Asset Pricing," Journal of Finance, American Finance Association, vol. 41(3), pages 751-62, July. [Downloadable!] (restricted)
  8. Dybvig, Philip H & Ross, Stephen A, 1985. " The Analytics of Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 401-16, June. [Downloadable!] (restricted)
  9. Dumas, Bernard & Luciano, Elisa, 1991. " An Exact Solution to a Dynamic Portfolio Choice Problem under Transactions Costs," Journal of Finance, American Finance Association, vol. 46(2), pages 577-95, June. [Downloadable!] (restricted)
  10. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166. [Downloadable!] (restricted)
  11. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  12. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August. [Downloadable!] (restricted)
  13. Cantor, David G & Lippman, Steven A, 1983. "Investment Selection with Imperfect Capital Markets," Econometrica, Econometric Society, vol. 51(4), pages 1121-44, July. [Downloadable!] (restricted)
  14. Clark, Stephen A., 1993. "The valuation problem in arbitrage price theory," Journal of Mathematical Economics, Elsevier, vol. 22(5), pages 463-478. [Downloadable!] (restricted)
  15. Cantor, David G & Lippman, Steven A, 1995. "Optimal Investment Selection with a Multitude of Projects," Econometrica, Econometric Society, vol. 63(5), pages 1231-40, September. [Downloadable!] (restricted)
  16. Dybvig, Philip H & Ingersoll, Jonathan E, Jr, 1982. "Mean-Variance Theory in Complete Markets," Journal of Business, University of Chicago Press, vol. 55(2), pages 233-51, April. [Downloadable!] (restricted)
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(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. Elyès Jouini, 1999. "Price Functionals with Bid-Ask Spreads: An Axiomatic Approach," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-038, New York University, Leonard N. Stern School of Business-. [Downloadable!]
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  2. Elyès Jouini, 2001. "Arbitrage and Control Problems in Finance. Presentation," Post-Print halshs-00167152_v1, HAL. [Downloadable!]
    Other versions:
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