Martingale and Arbitrage in Securities Markets with Transaction Cost

Journal of Economic Theory, Vol. 66, pp. 178-197, 1995

Posted: 16 Aug 2007

See all articles by Elyes Jouini

Elyes Jouini

Univ. Paris Dauphine - CEREMADE

Hedi Kallal

Salomon Smith Barney, Inc.

Abstract

We derive the implications from the absence of arbitrage in dynamic securities market with bi-ask spreads. The absence of arbitrage is equivalent to the existence of at least an equivalent probability measure that transforms some process between the bid and the ask price processes of traded securities into a martingale. These martingale measures can be interpreted as possible linear pricing rules and can be used to determine the investment opportunities available in such an economy. The minimum cost at which a contingent claim can be obtained through securities trading is its largest expected value with respect to the martingale measures.

Keywords: market , transaction costs

JEL Classification: G11, G12, G13

Suggested Citation

Jouini, Elyes and Kallal, Hedi, Martingale and Arbitrage in Securities Markets with Transaction Cost. Journal of Economic Theory, Vol. 66, pp. 178-197, 1995, Available at SSRN: https://ssrn.com/abstract=1007211

Elyes Jouini (Contact Author)

Univ. Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+ 33 1 44 05 46 75 (Phone)
+ 33 1 44 05 45 99 (Fax)

Hedi Kallal

Salomon Smith Barney, Inc.

New York, NY 10013
United States

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