Arbitrage with fixed costs and interest rate models

Elyès Jouini (), Hedi Kallal and Clotilde Napp
Additional contact information
Hedi Kallal: Citadel investment Group

Finance from University Library of Munich, Germany

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)
Date: 2003-12-05
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: Type of Document - pdf; prepared on Win98
References: Add references at CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0312/0312002.pdf (application/pdf)

Related works:
Journal Article: Arbitrage with Fixed Costs and Interest Rate Models (2006)
Working Paper: Arbitrage with Fixed Costs and Interest Rate Models (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0312002

Access Statistics for this paper

More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).