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No Arbitrage and Valuation in Markets with Realistic Transaction Costs


  • Dermody, Jaime Cuevas
  • Prisman, Eliezer Z.


One of the most fundamental results in finance is the equivalence of a no-arbitrage condition to the existence of a pricing operator in markets without transaction costs (see Ross (1978)). Garman and Ohlson (1981) extended this to markets with proportional transaction costs. The current paper further extends this result to markets with realistic (and nonproportional) transaction costs. These costs include all investors' market-impact and short-borrowing costs, large investors' institutional commissions, and for small investors only the additional cost of retail commissions. They are functions of the value of the trade and have increasing, increasing, constant, and decreasing marginal rates, respectively, in that value. Garman and Ohlson showed that equilibrium prices in their notion of a “corresponding” cost-free market, plus a certain factor, prevail under equilibrium in markets with proportional transaction costs. The current paper extends this to realistic transaction costs and establishes the functional relation between this factor and the form of such costs.

Suggested Citation

  • Dermody, Jaime Cuevas & Prisman, Eliezer Z., 1993. "No Arbitrage and Valuation in Markets with Realistic Transaction Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 65-80, March.
  • Handle: RePEc:cup:jfinqa:v:28:y:1993:i:01:p:65-80_00

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    Cited by:

    1. Bettzuge, Marc Oliver & Hens, Thorsten & Laitenberger, Marta & Siwik, Thomas, 2000. "On Choquet prices in a GEI-model with intermediation costs," Research in Economics, Elsevier, vol. 54(2), pages 133-152, June.
    2. Gianluca Cassese, 2014. "Option Pricing in an Imperfect World," Papers 1406.0412,, revised Sep 2016.
    3. Valeri Zakamouline, 2003. "European Option Pricing and Hedging with both Fixed and Proportional Transaction Costs," Finance 0311009, EconWPA.

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