IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

The fundamental theorem of asset pricing in the presence of bid-ask and interest rate spreads

Author Info

Listed author(s):
  • Roux, Alet
Registered author(s):

    Abstract

    Abstract We establish the fundamental theorem of asset pricing to a model with proportional transaction costs on trading in shares and different interest rates for borrowing and lending of cash. We show that such a model is free of arbitrage if and only if one can embed in it a friction-free model that is itself free of arbitrage, i.e. if there exists an artificial friction-free price for the stock between its bid and ask prices and an artificial interest rate between the borrowing and lending interest rates such that, if one discounts this stock price by this interest rate, then the resulting process is a martingale under some equivalent probability measure.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0304406811000085
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Mathematical Economics.

    Volume (Year): 47 (2011)
    Issue (Month): 2 (March)
    Pages: 159-163

    as
    in new window

    Handle: RePEc:eee:mateco:v:47:y:2011:i:2:p:159-163
    Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

    Keywords: Fundamental theorem of asset pricing Proportional transaction costs Different borrowing and lending rates;

    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.:

    as
    in new window


    1. repec:dau:papers:123456789/5630 is not listed on IDEAS
    2. Shunming Zhang & Chunlei Xu & Xiaotie Deng, 2002. "Dynamic Arbitrage-Free Asset Pricing with Proportional Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 12(1), pages 89-97.
    3. repec:crs:wpaper:9513 is not listed on IDEAS
    4. Napp, C., 2003. "The Dalang-Morton-Willinger theorem under cone constraints," Journal of Mathematical Economics, Elsevier, vol. 39(1-2), pages 111-126, February.
    5. Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
    6. Jaksa Cvitanić & Ioannis Karatzas, 1996. "HEDGING AND PORTFOLIO OPTIMIZATION UNDER TRANSACTION COSTS: A MARTINGALE APPROACH-super-2," Mathematical Finance, Wiley Blackwell, vol. 6(2), pages 133-165.
    7. Pham, Huyen & Touzi, Nizar, 1999. "The fundamental theorem of asset pricing with cone constraints," Journal of Mathematical Economics, Elsevier, vol. 31(2), pages 265-279, March.
    8. (**), Christophe Stricker & (*), Miklós Rásonyi & Yuri Kabanov, 2002. "No-arbitrage criteria for financial markets with efficient friction," Finance and Stochastics, Springer, vol. 6(3), pages 371-382.
    9. repec:dau:papers:123456789/5647 is not listed on IDEAS
    10. M. Dempster & I. Evstigneev & M. Taksar, 2006. "Asset Pricing and Hedging in Financial Markets with Transaction Costs: An Approach Based on the Von Neumann–Gale Model," Annals of Finance, Springer, vol. 2(4), pages 327-355, October.
    11. Kabanov, Yu. M. & Stricker, Ch., 2001. "The Harrison-Pliska arbitrage pricing theorem under transaction costs," Journal of Mathematical Economics, Elsevier, vol. 35(2), pages 185-196, April.
    12. repec:crs:wpaper:9514 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    as
    in new window


    Cited by:

    1. Gianluca Cassese, 2014. "Asset Pricing in an Imperfect World," Papers 1410.6408, arXiv.org.
    2. Takuji Arai, 2015. "Good deal bounds with convex constraints," Papers 1506.00396, arXiv.org.
    3. Takuji Arai, 2016. "Good deal bounds with convex constraints: --- examples and proofs ---," Keio-IES Discussion Paper Series 2016-017, Institute for Economics Studies, Keio University.
    4. Gianluca Cassese, 2014. "Option Pricing in an Imperfect World," Papers 1406.0412, arXiv.org, revised Sep 2016.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:47:y:2011:i:2:p:159-163. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.