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Arbitrage and Viability in Securities Markets with Fixed Trading Costs

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  • Elyès Jouini
  • Hédi Kallal
  • Clotilde Napp

Abstract

This paper studies foundational issues in securities markets models with fixed costs of trading, i.e. transaction costs that are bounded regardless of the transaction size, such as : fixed brokerage fees, investment taxes, operational and processing costs, or opportunity costs. We show that the absence of free lunches in such models is equivalent to the existence of a family of absolutely continuous probability measures for which the normalized price processes are martingales, conditional to any possible future event. This is a weaker condition than the absence of free lunches in frictionless models, which is equivalent to the existence of an equivalent martingale measure. We also show that the only arbitrage free pricing rules on the set of attainable contingent claims are those that are equal to the sum of an expected value with respect to any absolutely continuous martingale measure and of a bounded fixed cost functional. Moreover, these pricing rules are the only ones to be viable as models of economic equilibrium.

Suggested Citation

  • Elyès Jouini & Hédi Kallal & Clotilde Napp, 1999. "Arbitrage and Viability in Securities Markets with Fixed Trading Costs," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-033, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:99-033
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    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99033.pdf
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    Cited by:

    1. Chambers, Robert G. & Quiggin, John C., 2002. "Resource Allocation And Asset Pricing," Working Papers 28571, University of Maryland, Department of Agricultural and Resource Economics.
    2. Robert Kast & André Lapied, 2007. "Dynamically Consistent Conditional Choquet Capacities," ICER Working Papers - Applied Mathematics Series 20-2007, ICER - International Centre for Economic Research.
    3. Bruno Bouchard & Elyès Jouini, 2010. "Transaction Costs in Financial Models," Post-Print halshs-00703138, HAL.
    4. Napp, Clotilde, 2001. "Pricing issues with investment flows Applications to market models with frictions," Journal of Mathematical Economics, Elsevier, vol. 35(3), pages 383-408, June.
    5. repec:eee:spapps:v:127:y:2017:i:10:p:3331-3353 is not listed on IDEAS
    6. Tahir Choulli & Jun Deng & Junfeng Ma, 2015. "How non-arbitrage, viability and numéraire portfolio are related," Finance and Stochastics, Springer, vol. 19(4), pages 719-741, October.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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