Article1986

Valuation of Risky Assets in Arbitrage Free Economies with Frictions

78 citations0/0 files storedThe Journal of Finance

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Stochastic processes and financial applications Financial Markets and Investment Strategies Economic theories and models

Abstract

ABSTRACT This paper derives a framework for arbitrage models in markets with frictions. It generalizes the existence of a valuation operator to such markets. As in perfect markets, the valuation operator is a linear operator and its existence is implied by the no‐arbitrage condition. In imperfect markets the valuation operator is individual‐specific and depends on the agent's position in the market. The methodology employed in the paper is duality in convex programming.

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References

1979Martingales and arbitrage in multiperiod securities markets 1978A Simple Approach to the Valuation of Risky Streams 1977Risk and return in finance 1987Arbitrage and Martingales with Taxation 1981Valuation of risky assets in arbitrage-free economies with transactions costs

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2014A linear risk-return model for enhanced indexation in portfolio optimization 1993Econometric Evaluation of Asset Pricing Models 2015Put–Call Parity and market frictions 1993No Arbitrage and Valuation in Markets with Realistic Transaction Costs

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