Rational Asset Pricing Implications from Realistic Trading Frictions

Jean-Pierre Zigrand ()

The Journal of Business, 2005, vol. 78, issue 3, 871-892

Abstract: We study a simple rational expectations (RE) model whose asset pricing implications address some of the short-run mispricings, informational inefficiencies, and overreactions observed in real markets, without a need to resort to behavioral assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk and asset-specific orders. We show that arbitrage opportunities occur at the RE equilibrium that could not have occurred in a standard model. A certain degree of informativeness of prices to the traders is lost, leading to a decentralization and coordination problem. Asset prices are shown to overreact as a result.

Date: 2005
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Working Paper: Rational Asset Pricing Implications from Realistic Trading Frictions (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:871-892

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