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No-Arbitrage Pricing for Dividend-Paying Securities in Discrete-Time Markets with Transaction Costs

Tomasz R. Bielecki, Igor Cialenco and Rodrigo Rodriguez

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Abstract: We prove a version of First Fundamental Theorem of Asset Pricing under transaction costs for discrete-time markets with dividend-paying securities. Specifically, we show that the no-arbitrage condition under the efficient friction assumption is equivalent to the existence of a risk-neutral measure. We derive dual representations for the superhedging ask and subhedging bid price processes of a derivative contract. Our results are illustrated with a vanilla credit default swap contract.

New Economics Papers: this item is included in nep-cfn
Date: 2012-05, Revised 2013-06
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