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Rational Asset Pricing Implications from Realistic Trading Frictions

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  • Jean-Pierre Zigrand

    (London School of Economics)

Abstract

We study a simple rational expectations (RE) model whose asset pricing implications address some of the short-run mispricings, informational inefficiencies, and overreactions observed in real markets, without a need to resort to behavioral assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk and asset-specific orders. We show that arbitrage opportunities occur at the RE equilibrium that could not have occurred in a standard model. A certain degree of informativeness of prices to the traders is lost, leading to a decentralization and coordination problem. Asset prices are shown to overreact as a result.

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  • Jean-Pierre Zigrand, 2005. "Rational Asset Pricing Implications from Realistic Trading Frictions," The Journal of Business, University of Chicago Press, vol. 78(3), pages 871-892, May.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:871-892
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    1. Zigrand, Jean-Pierre, 2001. "Rational limits to arbitrage," LSE Research Online Documents on Economics 25068, London School of Economics and Political Science, LSE Library.

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