Arbitrage and viability in securities markets with fixed trading costs

This paper studies foundational issues in securities markets models with fixed costs of trading, i.e. transactions costs that are bounded regardless of the transaction size, such as fixed brokerage fees, investment taxes, operational, and processing costs or opportunity costs. We show that the absence of free lunches in such models is equivalent to the existence of a family of absolutely continuous probability measures for which the normalized securities price processes are martingales. This is a weaker condition than the absence of free lunch in frictionless models, which is equivalent to the existence of an equivalent martingale measure. We also show that the only arbitrage-free pricing rules on the set of attainable contingent claims are those that are equal to the sum of an expected value with respect to any absolutely continuous martingale measure and of a bounded fixed cost functional. Moreover, these pricing rules are the only ones to be viable as models of economic equilibrium.Arbitrage, Fixed costs, Absolutely continuous Martingale measure, Contingent claims pricing

Efficient Trading Strategies in the Presence of Market Frictions.

We provide a price characterization of efficient contingent claims - that is, chosen by at least a rational agent - in multiperiod economies with market frictions. Frictions include market incompleteness, transaction costs, short-selling, and borrowing costs. We characterize the inefficiency cost of a trading strategy - its required investment minus the largest amount necessary to obtain the same utility level - and we propose a measure of portfolio performance. We show that arbitrage bounds cannot be tightened based on efficiency without restricting preferences or endowments. We observe common investment strategies becoming inefficient with market frictions and others rationalized by them.Trading strategy; Market frictions;

Arbitrage And Viability in Securities Markets With Fixed Trading Costs

This paper studies foundational issues in securities markets models with fixed costs of trading, i.e. transaction costs that are bounded regardless of the transaction size, such as fixed brokerage fees, investment taxes, operational and processing costs, or opportunity costs. We show that the absence of free lunches in such models is equivalent to the existence of a family of absolutely continuous probability measures for which the normalized price processes are martingales, conditional to any possible future event. This is a weaker condition than the absence of free lunches in frictionless models, which is equivalent to the existence of an equivalent martingale measure. We also show that the only arbitrage free pricing rules on the set of attainable contingent claims are those that are equal to the sum of an expected value with respect to any absolutely continuous martingale measure and of a bounded fixed cost functional. Moreover, these pricing rules are the only ones to be viable as models of economic equilibrium

Growth in Cities

Recent theories of economic growth, including Romer (1986), Porter (1989) and Jacobs (1969), have stressed the role of technological spillovers in generating growth. Because such knowledge spillovers are particularly effective in cities, where communication between people is more extensive, data on the growth of industries in different cities allows us to test some of these theories. Using a new data set on the growth of large industries in 170 U.S. cities between 1956 and 1987, we find that local competition and urban variety, but not regional specialization, encourage employment growth in industries. The evidence suggests that important knowledge spillovers might be between, rather than within industries, consistent with the theories of Jacobs (1969).

Arbitrage And Viability in Securities Markets With Fixed Trading Costs

This paper studies foundational issues in securities markets models with fixed costs of trading, i.e. transaction costs that are bounded regardless of the transaction size, such as fixed brokerage fees, investment taxes, operational and processing costs, or opportunity costs. We show that the absence of free lunches in such models is equivalent to the existence of a family of absolutely continuous probability measures for which the normalized price processes are martingales, conditional to any possible future event. This is a weaker condition than the absence of free lunches in frictionless models, which is equivalent to the existence of an equivalent martingale measure. We also show that the only arbitrage free pricing rules on the set of attainable contingent claims are those that are equal to the sum of an expected value with respect to any absolutely continuous martingale measure and of a bounded fixed cost functional. Moreover, these pricing rules are the only ones to be viable as models of economic equilibrium

Factor Risk Premia and Variance Bounds

We consider the implications for mean factor risk premia for the variance of admissible (normalized) stochastic discount factors, or pricing kernels. For given mean risk premia, we identify lower bounds on the variance of the pricing kernel which exceed the variance of the projection of the pricing kernel on the (augmented) asset return space: the “Hansen and Jagannathan” variance bound. These lower bounds increase with the covariability between the components of the pricing kernel and of the factors which are not explained by asset returns, and decrease with the distance between the factors and the (augmented) asset-return space. As an application, we show that the inflation risk premium generated by a consumption-based pricing kernel implies a standard deviation of the kernel which is up to 15% higher than the Hansen and Jagannathan bound

Efficient Trading Strategies in the Presence of Market Frictions

In this paper we provide a price characterization of efficient consumption bundles in multiperiod economies with market frictions. Efficient consumption bundles are those that are chosen by at least one rational agent with monotonic state-independent and risk-averse preferences and a given future endowment. Frictions include dynamic market incompleteness, proportional transaction costs, short selling costs

Arbitraje en mercados de valores con fricciones

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General equilibrium with producers and brokers existence and regularity

In this paper we prove the existence of general equilibrium with transaction costs generalizing Hahn's (Review of Economic Studies, 1973, 40, 449-461) model by introducing producers and nonconvexities (in particular we allow for increasing returns in transaction sets). We also recover any exchange economy as a special case and this allows us to analyze the effects of small frictions on bid-ask prices, consumption vectors and utilities. We prove that, generically, the induced perturbations are of the same order as the frictions.ou

Efficient Trading Strategies in the Presence of Market Frictions

We provide a price characterization of efficient contingent claims - that is, chosen by at least a rational agent - in multiperiod economies with market frictions. Frictions include market incompleteness, transaction costs, short-selling, and borrowing costs. We characterize the inefficiency cost of a trading strategy - its required investment minus the largest amount necessary to obtain the same utility level - and we propose a measure of portfolio performance. We show that arbitrage bounds cannot be tightened based on efficiency without restricting preferences or endowments. We observe common investment strategies becoming inefficient with market frictions and others rationalized by them.ou