Rational limits to arbitrage
It is often argued that asset prices exhibit patterns incompatible with the behaviour of rational, optimizing agents. This paper proposes a rational framework which generates asset prices which appear irrational. This is accomplished by studying rational expectations equilibria in the presence of two realistic market frictions: immediacy risk (agents have to submit their demand functions before they know the equilibrium price) and asset-specific orders (investors have to submit one seperate demand for each asset, which may not be contingent upon the prices of the other assets). We study some of the properties of such equilibria, in particular the prevalence of arbitrage and of informational inefficiencies.
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- Jean-Pierre Zigrand, 1999. "Arbitrage and Endogenous Market Integration," FMG Discussion Papers dp319, Financial Markets Group.
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- James Dow & Gary Gorton, "undated". "Arbitrage Chains," Rodney L. White Center for Financial Research Working Papers 6-93, Wharton School Rodney L. White Center for Financial Research.
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- Sanford J. Grossman, 1977. "The Existence of Futures Markets, Noisy Rational Expectations and Informational Externalities," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 431-449.
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- Ausubel, Lawrence M., 1990. "Partially-revealing rational expectations equilibrium in a competitive economy," Journal of Economic Theory, Elsevier, vol. 50(1), pages 93-126, February.
- Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
- Heifetz, Aviad & Polemarchakis, Heracles M., 1998. "Partial Revelation with Rational Expectations," Journal of Economic Theory, Elsevier, vol. 80(1), pages 171-181, May.
- HEIFETZ, Aviad & POLEMARCHAKIS, Heracles M., "undated". "Partial revelation with rational expectations," CORE Discussion Papers RP 1324, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- HEIFETZ, Aviad & POLEMARCHAKIS, Heracles, 1995. "Partial Revelation with Rational Expectations," CORE Discussion Papers 1995079, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
- Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
- 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.
- Jean-Pierre Zigrand, 2002. "Rational Asset Pricing Implications from Realistic Trading Frictions," FMG Discussion Papers dp414, Financial Markets Group.
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