 Asset pricing in an imperfect worldEconomic Theory, 2017, vol. 64, issue 3, No 5, 539-570 Abstract: Abstract In a model with no given probability measure, we consider asset pricing in the presence of frictions and other imperfections and characterize the property of coherent pricing, a notion related to (but much weaker than) the no-arbitrage property. We show that prices are coherent if and only if the set of pricing measures is non-empty, i.e., if pricing by expectation is possible. We then obtain a decomposition of coherent prices highlighting the role of bubbles. Eventually, we show that under very weak conditions, the coherent pricing of options implies a very clear representation which permits, as in Breeden and Litzenberger (J Bus 51:621–651, 1978), to extract the implied probability. Keywords: Arbitrage; Bid/ask spreads; Bubbles; Coherence; Fundamental theorem of asset pricing; Risk-neutral probability; Transaction costs (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:64:y:2017:i:3:d:10.1007_s00199-016-0999-7 Ordering information: This journal article can be ordered from DOI: 10.1007/s00199-016-0999-7 Access Statistics for this article Economic Theory is currently edited by Nichoals Yanneils More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC. |
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