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Author: Erindi Allaj
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
This paper studies arbitrage pricing theory in financial markets with implicit transaction costs. We extend the existing theory to include the more realistic possibility that the price at which the investors trade is dependent on the traded volume. The investors in the market always buy at the ask and sell at the bid price. Implicit transaction costs are composed of two terms, one is able to capture the bid-ask spread, and the second the price impact. Moreover, a new definition of a self-financing portfolio is obtained. The self-financing condition suggests that continuous trading is possible, but is restricted to predictable trading strategies having càdlàg (right-continuous with left limits) and càdlàg (left-continuous with right limits) paths of bounded quadratic variation and of finitely many jumps. That is, càdlàg and càdlàg predictable trading strategies of infinite variation, with finitely many jumps and of finite quadratic variation are allowed in our setting. Restricting ourselves to càdlàg predictable trading strategies, we show that the existence of an equivalent probability measure is equivalent to the absence of arbitrage opportunities, so that the first fundamental theorem of asset pricing (FFTAP) holds. It is also shown that the use of continuous and bounded variation trading strategies can improve the efficiency of hedging in a market with implicit transaction costs. To better understand how to apply the theory proposed we provide an example of an implicit transaction cost economy that is linear and non-linear in the order size.
Author: Erindi Allaj
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
This paper studies arbitrage pricing theory in financial markets with implicit transaction costs. We extend the existing theory to include the more realistic possibility that the price at which the investors trade is dependent on the traded volume. The investors in the market always buy at the ask and sell at the bid price. Implicit transaction costs are composed of two terms, one is able to capture the bid-ask spread, and the second the price impact. Moreover, a new definition of a self-financing portfolio is obtained. The self-financing condition suggests that continuous trading is possible, but is restricted to predictable trading strategies having càdlàg (right-continuous with left limits) and càdlàg (left-continuous with right limits) paths of bounded quadratic variation and of finitely many jumps. That is, càdlàg and càdlàg predictable trading strategies of infinite variation, with finitely many jumps and of finite quadratic variation are allowed in our setting. Restricting ourselves to càdlàg predictable trading strategies, we show that the existence of an equivalent probability measure is equivalent to the absence of arbitrage opportunities, so that the first fundamental theorem of asset pricing (FFTAP) holds. It is also shown that the use of continuous and bounded variation trading strategies can improve the efficiency of hedging in a market with implicit transaction costs. To better understand how to apply the theory proposed we provide an example of an implicit transaction cost economy that is linear and non-linear in the order size.
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: 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: 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: Yakov Amihud
Publisher: Now Publishers Inc
ISBN: 1933019123
Category : Business & Economics
Languages : en
Pages : 109
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Book Description
Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
Author: Sumru Altug
Publisher: Cambridge University Press
ISBN: 1139474367
Category : Business & Economics
Languages : en
Pages : 702
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Book Description
This introduction to general equilibrium modelling takes an integrated approach to the analysis of macroeconomics and finance. It provides students, practitioners, and policymakers with an easily accessible set of tools that can be used to analyze a wide range of economic phenomena. Key features: • Provides a consistent framework for understanding dynamic economic models • Introduces key concepts in finance in a discrete time setting • Develops simple recursive approach for analyzing a variety of problems in a dynamic, stochastic environment • Sequentially builds up the analysis of consumption, production, and investment models to study their implications for allocations and asset prices • Reviews business cycle analysis and the business cycle implications of monetary and international models • Covers latest research on asset pricing in overlapping generations models and on models with borrowing constraints and transaction costs • Includes end-of-chapter exercises allowing readers to monitor their understanding of each topic Online resources are available at www.cambridge.org/altug_labadie
Author: Cheol-Won Yang
Publisher:
ISBN:
Category :
Languages : en
Pages : 59
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Book Description
The reason for the failure of asset pricing models can be divided into three categories: Transaction costs, investor irrationality, or missing risk factors. This study investigates which of the three categories best explains the poor performance of asset pricing models. We regress the differences between the expected return and the realized return on variables related to the failure of asset pricing models. First, we find that both transaction costs and investor irrationality are significantly related to the differences between the realized return and the expected return from the capital asset pricing model (CAPM) even after size and book-to-market are con-trolled. Second, we implement the same testing procedure for the CAPM to other 6 asset pricing models. The results of these regressions are all similar to those for the CAPM. Moreover, most of the Wald tests cannot reject the null hypothesis that the coefficients of asset pricing models are the same except for the consumption CAPM and the conditional CAPM. These results indicate that models with more risk factors than the CAPM cannot improve the CAPM's failure caused by transaction costs and investor irrationality. There-fore, we argue that transaction costs and investor irrationality present a fundamental limit to the improvement of an asset pricing model that cannot be compensated by additional factors.
Author: Greg Anderson
Publisher: Springer Nature
ISBN: 3031023994
Category : Mathematics
Languages : en
Pages : 51
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Book Description
This is a short book on the fundamental concepts of the no-arbitrage theory of pricing financial derivatives. Its scope is limited to the general discrete setting of models for which the set of possible states is finite and so is the set of possible trading times--this includes the popular binomial tree model. This setting has the advantage of being fairly general while not requiring a sophisticated understanding of analysis at the graduate level. Topics include understanding the several variants of "arbitrage", the fundamental theorems of asset pricing in terms of martingale measures, and applications to forwards and futures. The authors' motivation is to present the material in a way that clarifies as much as possible why the often confusing basic facts are true. Therefore the ideas are organized from a mathematical point of view with the emphasis on understanding exactly what is under the hood and how it works. Every effort is made to include complete explanations and proofs, and the reader is encouraged to work through the exercises throughout the book. The intended audience is students and other readers who have an undergraduate background in mathematics, including exposure to linear algebra, some advanced calculus, and basic probability. The book has been used in earlier forms with students in the MS program in Financial Mathematics at Florida State University, and is a suitable text for students at that level. Students who seek a second look at these topics may also find this book useful. Table of Contents: Overture: Single-Period Models / The General Discrete Model / The Fundamental Theorems of Asset Pricing / Forwards and Futures / Incomplete Markets
Author: Mr.Charles Frederick Kramer
Publisher: International Monetary Fund
ISBN: 1451854870
Category : Business & Economics
Languages : en
Pages : 36
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Book Description
The relationship of stock returns and trading volume is the focus of much recent interest. I examine an economic model of a rational trader who operates in a market with transactions costs and noise trading. The level of trading affects the rational trader’s marginal cost of transacting; as a result, trading volume is a source of risk. This engenders an equilibrium relationship between returns and volume. The model also provides a simple way to scrutinize this relationship empirically. Empirical evidence supports the implications of the model.
Author: Jochen E.M. Wilhelm
Publisher: Springer Science & Business Media
ISBN: 3642500943
Category : Business & Economics
Languages : en
Pages : 124
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Book Description
The present 'Introductory Lectures on Arbitrage-based Financial Asset Pricing' are a first attempt to give a comprehensive presentation of Arbitrage Theory in a discrete time framework (by the way: all the re sults given in these lectures apply to a continuous time framework but, probably, in continuous time we could achieve stronger results - of course at the price of stronger assumptions). It has been turned out in the last few years that capital market theory as derived and evolved from the capital asset pricing model (CAPM) in the middle sixties, can, to an astonishing extent, be based on arbitrage arguments only, rather than on mean-variance preferences of investors. On the other hand, ar bitrage arguments provided access to a wider range of results which could not be obtained by standard CAPM-methods, e. g. the valuation of contingent claims (derivative assets) Dr the_ investigation of futures prices. To some extent the presentation will loosely follow historical lines. A selected set of capital asset pricing models will be derived according to their historical progress and their increasing complexity as well. It will be seen that they all share common structural properties. After having made this observation the presentation will become an axiomatical one: it will be stated in precise terms what arbitrage is about and what the consequences are if markets do not allow for risk-free arbitrage opportunities. The presentation will partly be accompanied by an illus trating example: two-state option pricing.
