Arbitrage with fixed costs and interest rate models

Elyès Jouini (), Hedi Kallal and Clotilde NAPP
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Hedi Kallal: Citadel investment Group

Finance from EconWPA

Abstract: In this paper, we start by considering market models with fixed costs; in such a context, we characterize the absence of arbitrage opportunity and we provide pricing rules. We then apply these results to extend some classical interest rate and option pricing models. In particular, we prove that the quite surprising result obtained by Dybvig-Ingersoll-Ross $\left( 1996\right) $, which asserts that, under the assumption of absence of arbitrage, long zero-coupon rates can never fall, is no longer true in models with fixed costs. Models where the long rate follows a diffusion process as in Brennan-Schwartz $\left( 1979\right) $ are no more to be rejected for arbitrage considerations.

Keywords: fixed costs; transaction costs; interest rates; long zero- coupon rates; Dybvig-Ingersoll-Ross (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 2003-12-05
Note: Type of Document - pdf; prepared on Win98

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http://129.3.20.41/eps/fin/papers/0312/0312002.pdf (application/pdf)

Related works:
Working Paper: Arbitrage with fixed costs and interest rate models (2006)
Working Paper: Arbitrage with Fixed Costs and Interest Rate Models (2006)
Journal Article: Arbitrage with Fixed Costs and Interest Rate Models (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0312002

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