Market imperfections, equilibrium and arbitrage

Elyès Jouini ()

Finance from University Library of Munich, Germany

Abstract: The theory of asset pricing, which takes its roots in the Arrow-Debreu model (Theory of value [1959, chap. 7]), the Black and Sholes formula (1973) and Cox and Ross (1976 a and b), has been formalized in a general framework by Harrison and Kreps (1979), Harrison and Pliska (1979) and Kreps (1981). In these models, securities markets are assumed to be frictionless. The main result is that a price process is arbitrage free (or, equivalently, compatible with some equilibrium) if and only if it is, when appropriately renormalized, a martingale for some equivalent probability measure. The theory of pricing by arbitrage follows from there. Contingent claims can be priced by taking their expected value with respect to an equivalent martingale measure. If this value is unique, the claim is said to be priced by arbitrage. The new probabilities can be interpreted as state prices (the prices of $1$ dollar tomorrow in each state of the world) or as the intertemporal marginal rates of substitution of an agent maximizing his expected utility. In this work, we will propose a general model that takes frictions into account.

Keywords: transaction costs; shortsales constraints; frictions; market imperfections; arbitrage; viability; different borrowing and lending rates; borrowing constraints; arbitrage pricing (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Pages: 55 pages
Date: 2003-12-08
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: Type of Document - pdf; prepared on Win98; pages: 55
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0312/0312005.pdf (application/pdf)

Related works:
Working Paper: Market imperfections, equilibrium and arbitrage (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0312005

Access Statistics for this paper

More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).