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Rational asset pricing implications from realistic trading frictions

By Jean-Pierre Zigrand

Abstract

We study a simple rational expectations (RE) model whose asset pricing implications address some of the short-run mispricings, informational inefficiencies, and overreactions observed in real markets, without a need to resort to behavioral assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk and asset-specific orders. We show that arbitrage opportunities occur at the RE equilibrium that could not have occurred in a standard model. A certain degree of informativeness of prices to the traders is lost, leading to a decentralization and coordination problem. Asset prices are shown to overreact as a result

Topics: HF Commerce
Publisher: University of Chicago Press
Year: 2005
DOI identifier: 10.1086/429647
OAI identifier: oai:eprints.lse.ac.uk:16457
Provided by: LSE Research Online
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