IDEAS home Printed from https://ideas.repec.org/a/ucp/jnlbus/v78y2005i3p871-892.html
   My bibliography  Save this article

Rational Asset Pricing Implications from Realistic Trading Frictions

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/429647
    File Function: main text
    Download Restriction: Access to the online full text or PDF requires a subscription.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Driessen, Joost & Klaassen, Pieter & Melenberg, Bertrand, 2003. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(03), pages 635-672, September.
    2. Jondeau, Eric & Rockinger, Michael, 2000. "Reading the smile: the message conveyed by methods which infer risk neutral densities," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 885-915, December.
    3. Patrick Navatte & Christophe Villa, 2000. "The information content of implied volatility, skewness and kurtosis: empirical evidence from long-term CAC 40 options," European Financial Management, European Financial Management Association, vol. 6(1), pages 41-56.
    4. Bookstaber, Richard M & McDonald, James B, 1987. "A General Distribution for Describing Security Price Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 401-424, July.
    5. McDonald, James B. & Xu, Yexiao J., 1995. "A generalization of the beta distribution with applications," Journal of Econometrics, Elsevier, vol. 69(2), pages 427-428, October.
    6. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
    7. Wolfgang Bühler & Marliese Uhrig-Homburg & Ulrich Walter & Thomas Weber, 1999. "An Empirical Comparison of Forward-Rate and Spot-Rate Models for Valuing Interest-Rate Options," Journal of Finance, American Finance Association, vol. 54(1), pages 269-305, February.
    8. Craig Merrill & David Babbel, 1996. "Interest‐rate option pricing revisited," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 859-863, December.
    9. Badrinath, S G & Chatterjee, Sangit, 1991. "A Data-Analytic Look at Skewness and Elongation in Common-Stock-Return Distributions," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(2), pages 223-233, April.
    10. Badrinath, S G & Chatterjee, Sangit, 1988. "On Measuring Skewness and Elongation in Common Stock Return Distributions: The Case of the Market Index," The Journal of Business, University of Chicago Press, vol. 61(4), pages 451-472, October.
    11. Jackwerth, Jens Carsten, 1999. "Option Implied Risk-Neutral Distributions and Implied Binomial Trees: A Literature Review," MPRA Paper 11634, University Library of Munich, Germany.
    12. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    13. Kabir K. Dutta & David F. Babbel, 2002. "On Measuring Skewness and Kurtosis in Short Rate Distributions: The Case of the US Dollar London Inter Bank Offer Rates," Center for Financial Institutions Working Papers 02-25, Wharton School Center for Financial Institutions, University of Pennsylvania.
    14. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    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.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:871-892. 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: (Journals Division). General contact details of provider: http://www.journals.uchicago.edu/JB/ .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.