Martingales and arbitrage in securities markets with transaction costs
We derive the implications from the absence of arbitrage in dynamic securities markets with bid-ask spreads. The absence of arbitrage is equivalent to the existence of at least an equivalent probability measure that transforms some process between the bid and the ask price processes of traded securities into a martingale. The martingale measures can be interpreted as possible linear pricing rules and can be used to determine the investment opportunities available in such an economy. The minimum cost at which a contingent claim can be obtained through securities trading is its largest expected value with respect to the martingale measures.
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|Date of creation:||Jun 1995|
|Date of revision:|
|Publication status:||Published in Journal of Economic Theory, 1995, Vol. 66, no. 1. pp. 178-197.Length: 19 pages|
|Contact details of provider:|| Web page: http://www.dauphine.fr/en/welcome.html|
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