Rational limits to arbitrage

Jean-Pierre Zigrand

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: It is often argued that asset prices exhibit patterns incompatible with the behaviour of rational, optimizing agents. This paper proposes a rational framework which generates asset prices which appear irrational. This is accomplished by studying rational expectations equilibria in the presence of two realistic market frictions: immediacy risk (agents have to submit their demand functions before they know the equilibrium price) and asset-specific orders (investors have to submit one seperate demand for each asset, which may not be contingent upon the prices of the other assets). We study some of the properties of such equilibria, in particular the prevalence of arbitrage and of informational inefficiencies.

JEL-codes: D50 D8 G12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2001-10-01
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Citations: View citations in EconPapers (2)

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