Empty Promises and Arbitrage

Posted: 21 May 1999

See all articles by Gregory A. Willard

Gregory A. Willard

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Multiple version iconThere are 2 versions of this paper

Abstract

Analysis of absence of arbitrage normally ignores payoffs in states to which the agent assigns zero probability. We extend the Fundamental Theorem of Asset Pricing to the case of "no empty promises" in which the agent cannot promise arbitrarily large payments in some states. There is a super-positive pricing rule that can assign positive price to claims in zero probability states important to the market as well as assigning positive prices to claims in the states of positive probability. With continuous information arrival, no-empty-promises can be enforced by shutting down the agent's subsequent investments once wealth hits zero.

JEL Classification: G12

Suggested Citation

Willard, Gregory A. and Dybvig, Philip H., Empty Promises and Arbitrage. Available at SSRN: https://ssrn.com/abstract=161618

Gregory A. Willard (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-2933 (Phone)
617-258-6855 (Fax)

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,102
PlumX Metrics