Pricing rules with market frictions: an axiomatic approach

Bernard Cornet ()
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Bernard Cornet: University of Kansas

Theory and Decision, 2025, vol. 99, issue 1, No 6, 123-150

Abstract: Abstract Market frictions have motivated the development of nonlinear asset pricing models, as any departure from linearity in pricing reflects the presence of some form of friction. While sublinear pricing has been extensively studied, recent advances have extended the framework to encompass more general, and potentially nonconvex, pricing rules, most notably Choquet pricing. These developments raise foundational questions regarding the nature of arbitrage, which are central to this paper. In particular, relaxing the assumption of subadditivity introduces fundamental challenges. The set of admissible arbitrage opportunities broadens, allowing, for instance, multiple simultaneous buy-and-sell arbitrage opportunities that subadditivity would rule out by construction. These observations highlight the need for a generalized notion of arbitrage that operates under minimal assumptions, specifically, without relying on convexity, subadditivity, or even monotonicity of the pricing rule. This paper adresses these issues by taking the market pricing rule as a primitive concept, exogenously specified and defined axiomatically.

Keywords: Pricing rule; Subadditivity; Arbitrage opportunities; Market frictions; Bid-ask spread; Choquet pricing rule (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11238-025-10059-7

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