Submodular financial markets with frictions
Alain Chateauneuf () and
Bernard Cornet ()
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Bernard Cornet: University of Kansas
Economic Theory, 2022, vol. 73, issue 2, No 16, 744 pages
Abstract This paper studies arbitrage-free financial markets with bid-ask spreads whose super-hedging prices are submodular. The submodular assumption on the super-hedging price, or the supermodularity usually assumed on utility functions, is the formal expression of perfect complementarity, which dates back to Fisher, Pareto, and Edgeworth, according to Samuelson (J Econ Lit 12:1255–1289, 1974). Our main contribution provides several characterizations of financial markets with frictions that are submodular as a consequence of a more general study of submodular pricing rules. First, a market is submodular if and only if its super-hedging price is a Choquet integral and if and only if its set of risk-neutral probabilities is representable as the core of a submodular non-additive probability that is uniquely defined, called risk-neutral capacity. Second, a market is representable by its risk neutral capacity if and only if it is equivalent to a market, only composed of bid-ask event securities.
Keywords: Submodularity; financial markets; Frictions; Bid-ask; Arbitrage; Multi-prior model; Super-hedging price; Super-replication; Risk measure; Pricing rules; Choquet integral; Event securities (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 (search for similar items in EconPapers)
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