Link-save trading and pricing of contingent claims
AbstractTransaction costs involved while trading several assets may be described using bid-ask spread of the asset prices. We assume that the prices of several assets may be linked, so that transactions involving several assets have prices that are not necessarily equal to the sums of (bid or ask) prices of the individual assets. The family of possible price combinations forms a convex (random) set which changes in time and is called the set-valued price process. It is shown that the necessary and sufficient condition for no arbitrage is the existence of a martingale selection, i.e. a martingale that takes values in the set-valued price process. Examples and applications to option pricing are discussed.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0511017.
Length: 26 pages
Date of creation: 29 Nov 2005
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bid-ask spread; multiple assets; price process; set-valued process; transaction costs;
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- G - Financial Economics
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New York University, Leonard N. Stern School Finance Department Working Paper Seires
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