Pricing rules with market frictions: an axiomatic approach

Bernard Cornet
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Bernard Cornet: Department of Economics, University of Kansas, Lawrence, KS 66045, USA

No 202606, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: This paper studies markets with frictions, taking the market price as the primitive concept, assumed to be exogenously given and defined axiomatically. To account for general types of frictions, we consider market pricing rules that go beyond the subadditive framework. However, extending the model beyond subadditivity significantly broadens the set of possible arbitrage opportunities, for example, allowing for multiple buy and sell arbitrage opportunities, which would previously have been automatically excluded by subadditivity. As in the standard theory of asset pricing, the extended framework is developed under the assumption that markets have no standard arbitrage opportunities, but also no generalized ones. Applications are provided to pricing rules represented by discounted Choquet expectations with respect to risk-neutral, nonadditive probabilities, without assuming submodularity (i.e., concavity).

Keywords: Pricing rule; subadditivity; arbitrage opportunities; market frictions; bid-ask spread; Choquet pricing rule (search for similar items in EconPapers)
JEL-codes: C71 D81 G12 (search for similar items in EconPapers)
Date: 2026-02
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Persistent link: https://EconPapers.repec.org/RePEc:kan:wpaper:202606

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