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Author: Alessandro Citanna
Publisher:
ISBN: 9782854187175
Category :
Languages : en
Pages : 16
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Book Description
In many security markets, market-makers offer offer to trade at a discount relative to their posted bid and ask quotes. In this article we provide an explanation to this phenomenon. We show that market-makers can mitigate informational asymmetries by selectively offering price improvements to their regular clients. We study a specific type of pricing strategy which consists (a) in offering price improvements to investors who have not repeatedly inflicted trading losses to the marker-maker and (b) in temporarily suspending these discounts otherwise. We find that when a market-maker uses this pricing strategy, there are equilibria in which his clients optimally choose not to contact him when they have private information. These equilibria Pareto-dominate those which are obtained when the market-maker does not or can not make his quotes contingent on his clients' trading histories. Our model predicts that (1) market-makers should grant price improvements to their regular clients but that (2) these improvements should be temporarily suspended after sequences of purchases (sales) followed by price increases (decreases).
Author: Alessandro Citanna
Publisher:
ISBN: 9782854187175
Category :
Languages : en
Pages : 16
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Book Description
In many security markets, market-makers offer offer to trade at a discount relative to their posted bid and ask quotes. In this article we provide an explanation to this phenomenon. We show that market-makers can mitigate informational asymmetries by selectively offering price improvements to their regular clients. We study a specific type of pricing strategy which consists (a) in offering price improvements to investors who have not repeatedly inflicted trading losses to the marker-maker and (b) in temporarily suspending these discounts otherwise. We find that when a market-maker uses this pricing strategy, there are equilibria in which his clients optimally choose not to contact him when they have private information. These equilibria Pareto-dominate those which are obtained when the market-maker does not or can not make his quotes contingent on his clients' trading histories. Our model predicts that (1) market-makers should grant price improvements to their regular clients but that (2) these improvements should be temporarily suspended after sequences of purchases (sales) followed by price increases (decreases).
Author: Hua Cheng
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
We develop a dynamic model in which traders have differential information about the true value of the risky asset and trade the risky asset with proportional transaction costs. We show that without additional assumption, trading volume can not totally remove the noise in the pricing equation. However, because trading volume increases in the absolute value of noisy per capita supply change, it provides useful information on the asset fundamental value which cannot be inferred from the equilibrium price.We further investigate the relation between trading volume, price autocorrelation, return volatility and proportional transaction costs. Firstly, trading volume decreases in proportional transaction costs and the influence of proportional transaction costs decreases at the margin. Secondly, price autocorrelation can be generated by proportional transaction costs: under no transaction costs, the equilibrium prices at date 1 and 2 are not correlated; however under proportional transaction costs, they are correlated - the higher (lower) the equilibrium price at date 1, the lower (higher) the equilibrium price at date 2. Thirdly, we show that return volatility may be increasing in proportional transaction costs, which is contrary to Stiglitz 1989, Summers amp; Summers 1989's reasoning but is consistent with Umlauf 1993 and Jones amp; Seguin 1997's empirical results.
Author: Xiaotie Deng
Publisher: London : Department of Economics, University of Western Ontario
ISBN:
Category : Arbitrage
Languages : en
Pages : 24
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Book Description
Author: Erhan Bayraktar
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
We prove the Fundamental Theorem of Asset Pricing for a discrete time financial market where trading is subject to proportional transaction cost and the asset price dynamic is modeled by a family of probability measures, possibly non-dominated.Using a backward-forward scheme, we show that when the market consists of a money market account and a single stock, no-arbitrage in a quasi-sure sense is equivalent to the existence of a suitable family of consistent price systems. We also show that when the market consists of multiple dynamically traded assets and satisfies efficient friction, strict no-arbitrage in a quasi-sure sense is equivalent to the existence of a suitable family of strictly consistent price systems.
Author: Stefan Gerhold
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities, and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the optimal investment policy, its implied welfare, liquidity premium, and trading volume. At the first order, the liquidity premium equals the spread, times share turnover, times a universal constant. Results are robust to consumption and finite-horizons. We exploit the equivalence of the transaction cost market to another frictionless market, with a shadow risky asset, in which investment opportunities are stochastic. The shadow price is also found explicitly.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Tomasz Zastawniak
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
American options are priced and hedged in a general discrete market in the presence of arbitrary proportional transaction costs inherent in trading the underlying asset, modelled as bid-ask spreads. Pricing, hedging and optimal stopping algorithms are established for a short position (seller's position) in an American option with an arbitrary payoff settled by physical delivery. The seller's price representation as the expectation of the stopped payoff under an approximate martingale measure is also considered. The algorithms cover and extend the various special cases considered in the literature to-date. Any specific restrictions that were imposed on the form of the payoff, the magnitude of transaction costs or the discrete market model itself are relaxed. The pricing algorithm under transaction costs can be viewed as a natural generalisation of the iterative Snell envelope construction.
Author: Alet Roux
Publisher:
ISBN:
Category :
Languages : en
Pages : 18
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Book Description
We extend the fundamental theorem of asset pricing to a model where the risky stock is subject to proportional transaction costs in the form of bid-ask spreads and the bank account has different interest rates for borrowing and lending. We show that such a model is free of arbitrage if and only if one can embed in it a friction-free model that is itself free of arbitrage, in the sense that there exists an artificial friction-free price for the stock between its bid and ask prices and an artificial interest rate between the borrowing and lending interest rates such that, if one discounts this stock price by this interest rate, then the resulting process is a martingale under some non-degenerate probability measure. Restricting ourselves to the simple case of a finite number of time steps and a finite number of possible outcomes for the stock price, the proof follows by combining classical arguments based on finite-dimensional separation theorems with duality results from linear optimisation.
Author: Yuri Kabanov
Publisher: Springer Science & Business Media
ISBN: 3540681213
Category : Business & Economics
Languages : en
Pages : 306
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Book Description
The book is the first monograph on this highly important subject.
Author: Adrian Buss
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
In this paper, we study the effect of proportional transaction costs on consumption-portfolio decisions and asset prices in a dynamic general equilibrium economy with a financial market that has a single-period bond and two risky stocks, one of which incurs the transaction cost. Our model has multiple investors with stochastic labor income, heterogeneous beliefs, and heterogeneous Epstein-Zin-Weil utility functions. The transaction cost gives rise to endogenous variations in liquidity. We show how equilibrium in this incomplete-markets economy can be characterized and solved for in a recursive fashion. We have two main findings. One, costs for trading a stock lead to a substantial reduction in the trading volume of that stock, but have only a small effect on the trading volume of the other stock and the bond. Two, even in the presence of stochastic labor income and heterogeneous beliefs, transaction costs have only a small effect on the consumption decisions of investors, and hence, on equity risk premia and the liquidity premium.
