Transaction Costs in Financial Models

Bruno Bouchard () and Elyès Jouini ()
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Bruno Bouchard: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, LFA - Laboratoire de Finance Assurance - Centre de Recherche en Économie et STatistique (CREST)

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Abstract: Standard models for fi nancial markets are based on the simplifying assumption that trading orders can be given and executed in continuous time with no friction. This assumption is clearly a strong idealization of the reality. In particular, securities should not be described by a single price but by a bid and ask curve. As a first approximation, one may assume that the bid and ask prices do not depend on the traded quantities which leads to models with proportional transaction costs. These models have attracted a lot of attention these lasts years, mostly because their linear structure allows to develop a nice duality theory as in frictionless models.

Keywords: arbitrage.; Proportional transaction costs; continuous time; trading orders; frictionless models; super-hedging; solvency region; arbitrage (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00703138v1
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Published in Encyclopedia of Quantitative Finance, wiley, pp.7, 2010

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