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Arbitrage-Free Price-Update and Price-Impact Functions

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  • Werner Stanzl
  • Gur Huberman

Abstract

Consider a trading environment where trading volume affects security prices. We show that when the price impact is time stationary, only linear price-impact functions rule out arbitrage. This is true whether a single asset or a portfolio of assets is traded. When the temporary and perm

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File URL: http://icfpub.som.yale.edu/publications/2550
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm164.

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Date of creation: 01 Dec 2000
Date of revision: 01 Jan 2001
Handle: RePEc:ysm:somwrk:ysm164

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Web page: http://icf.som.yale.edu/
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  1. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
  2. Luis A. Medrano & Xavier Vives, 1997. "Strategic behavior and price discovery," Economics Working Papers 238, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
  4. repec:att:wimass:9427 is not listed on IDEAS
  5. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. " Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-70, March.
  6. Kempf, Alexander & Korn, Olaf, 1999. "Market depth and order size1," Journal of Financial Markets, Elsevier, vol. 2(1), pages 29-48, February.
  7. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September.
  8. Gemmill, Gordon, 1996. " Transparency and Liquidity: A Study of Block Trades on the London Stock Exchange under Different Publication Rules," Journal of Finance, American Finance Association, vol. 51(5), pages 1765-90, December.
  9. Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, A. Craig, 1992. "An ordered probit analysis of transaction stock prices," Journal of Financial Economics, Elsevier, vol. 31(3), pages 319-379, June.
  10. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
  11. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
  12. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
  13. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  14. Dutta, Prajit K. & Madhavan, Ananth, 1995. "Price Continuity Rules and Insider Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(02), pages 199-221, June.
  15. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
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Cited by:
  1. Liu, Hong & Yong, Jiongmin, 2005. "Option pricing with an illiquid underlying asset market," Journal of Economic Dynamics and Control, Elsevier, vol. 29(12), pages 2125-2156, December.
  2. Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc.

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