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Link-save trading and pricing of contingent claims

Listed author(s):
  • Katsiaryna Kaval

    (University of Glasgow)

  • Ilya Molchanov

    (University of Bern)

Registered author(s):

    Transaction costs involved while trading several assets may be described using bid-ask spread of the asset prices. We assume that the prices of several assets may be linked, so that transactions involving several assets have prices that are not necessarily equal to the sums of (bid or ask) prices of the individual assets. The family of possible price combinations forms a convex (random) set which changes in time and is called the set-valued price process. It is shown that the necessary and sufficient condition for no arbitrage is the existence of a martingale selection, i.e. a martingale that takes values in the set-valued price process. Examples and applications to option pricing are discussed.

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    Paper provided by EconWPA in its series Finance with number 0511017.

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    Length: 26 pages
    Date of creation: 29 Nov 2005
    Handle: RePEc:wpa:wuwpfi:0511017
    Note: Type of Document - pdf; pages: 26
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    1. Jouini, Elyes, 2000. "Price functionals with bid-ask spreads: an axiomatic approach," Journal of Mathematical Economics, Elsevier, vol. 34(4), pages 547-558, December.
    2. Hess, Christian, 1991. "On multivalued martingales whose values may be unbounded: martingale selectors and mosco convergence," Journal of Multivariate Analysis, Elsevier, vol. 39(1), pages 175-201, October.
    3. 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.
    4. Y.M. Kabanov, 1999. "Hedging and liquidation under transaction costs in currency markets," Finance and Stochastics, Springer, vol. 3(2), pages 237-248.
    5. 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.
    6. M. Avellaneda & A. Levy & A. ParAS, 1995. "Pricing and hedging derivative securities in markets with uncertain volatilities," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(2), pages 73-88.
    7. repec:dau:papers:123456789/5630 is not listed on IDEAS
    8. repec:crs:wpaper:9513 is not listed on IDEAS
    9. 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.
    10. repec:dau:papers:123456789/9322 is not listed on IDEAS
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