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Asset pricing and hedging in financial markets with transaction costs: an approach based on the von Neumann-Gale model

  • M A H Dempster

    ()

    (Centre for Financial Research, Judge Business School, University of Cambridge)

  • I V Evstigneev

    ()

    (Economic Studies, School of Social Sciences, University of Manchester)

  • M I Taksar

    ()

    (Mathematics Department, University of Missouri)

The paper develops a general discrete-time framework for asset pricing and hedging in financial markets with proportional transaction costs and trading constraints. The framework is suggested by analogies between dynamic models of financial markets and (stochastic versions of) the von Neumann-Gale model of economic growth. The main results are hedging criteria stated in terms of "dual variables" -- consistent prices and consistent discount factors. It is shown how these results can be applied to a number of specialized models involving transaction costs and portfolio restrictions.

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File URL: http://www-cfr.jbs.cam.ac.uk/archive/PAPERS/2005/WP06.pdf
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File Function: Working paper version, 2005
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Paper provided by University of Cambridge, Judge Business School, Centre for Financial Research in its series Working Papers with number 062005.

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Length: 51 pages
Date of creation: 2005
Date of revision:
Publication status: Published in Annals of Finance 2.2 (2006), pages 327-355
Handle: RePEc:jbs:wpaper:062005
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  1. Jouini, Elyes, 2001. "Arbitrage and control problems in finance: A presentation," Journal of Mathematical Economics, Elsevier, vol. 35(2), pages 167-183, April.
  2. Elyès Jouini & Hédi Kallal, 1997. "Viability and Equilibrium in Securities Markets with Frictions," Working Papers 97-07, Centre de Recherche en Economie et Statistique.
  3. Elyès Jouini, 1997. "Price Functionals with Bid-Ask Spreads : An Axiomatic Approach," Working Papers 97-05, Centre de Recherche en Economie et Statistique.
  4. Jouini, Elyès & Kallal, Hedi, 1995. "Arbitrage in securities markets with short-sales constraints," Economics Papers from University Paris Dauphine 123456789/5647, Paris Dauphine University.
  5. Jouini, Elyès, 2001. "Arbitrage and control problems in finance: A presentation," Economics Papers from University Paris Dauphine 123456789/5590, Paris Dauphine University.
  6. Kabanov, Yu. M. & Stricker, Ch., 2001. "The Harrison-Pliska arbitrage pricing theorem under transaction costs," Journal of Mathematical Economics, Elsevier, vol. 35(2), pages 185-196, April.
  7. Elyès Jouini & Clotilde Napp, 1999. "Arbitrage and Investment Opportunities," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-034, New York University, Leonard N. Stern School of Business-.
  8. Kreps, David M., 1981. "Arbitrage and equilibrium in economies with infinitely many commodities," Journal of Mathematical Economics, Elsevier, vol. 8(1), pages 15-35, March.
  9. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  10. Kallal, Hedi & Jouini, Elyès, 1995. "Martingales and arbitrage in securities markets with transaction costs," Economics Papers from University Paris Dauphine 123456789/5630, Paris Dauphine University.
  11. Igor V. Evstigneev & Klaus Schürger & Michael I. Taksar, 2002. "On the fundamental theorem of asset pricing: random constraints and bang-bang no-arbitrage criteria," Bonn Econ Discussion Papers bgse24_2002, University of Bonn, Germany.
  12. Bernard Bensaid & Jean-Philippe Lesne & Henri Pagès & José Scheinkman, 1992. "Derivative Asset Pricing With Transaction Costs," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 63-86.
  13. repec:fth:inseep:9514 is not listed on IDEAS
  14. 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.
  15. repec:fth:inseep:9513 is not listed on IDEAS
  16. Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
  17. Elyégs Jouini & Hédi Kallal, 1995. "Arbitrage In Securities Markets With Short-Sales Constraints," Mathematical Finance, Wiley Blackwell, vol. 5(3), pages 197-232.
  18. Jouini, Elyès & Kallal, Hedi, 1999. "Viability and equilibrium in securities markets with frictions," Economics Papers from University Paris Dauphine 123456789/5603, Paris Dauphine University.
  19. Jouini Elyes & Kallal Hedi, 1995. "Martingales and Arbitrage in Securities Markets with Transaction Costs," Journal of Economic Theory, Elsevier, vol. 66(1), pages 178-197, June.
  20. Y.M. Kabanov, 1999. "Hedging and liquidation under transaction costs in currency markets," Finance and Stochastics, Springer, vol. 3(2), pages 237-248.
  21. Jouini, Elyès & Napp, Clotilde, 2001. "Arbitrage and investment opportunities," Economics Papers from University Paris Dauphine 123456789/5591, Paris Dauphine University.
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