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Viable Costs and Equilibrium Prices in Frictional Securities Markets

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  • Zhiwu Chen

    (Yale University School of Management)

Abstract

This paper studies security markets with trading frictions, and offers a complete characterization of viable convex cost systems. For frictional markets that give rise to a convex-cone traded-payoff span and a sublinear payoff cost functional, the following three conditions are equivalent: viability, the extension property, and the absence of free lunches. Special cases in this class of markets include perfect-markets economies [Harrison and Kreps (1979)], economies with proportional transaction costs [Jouini and Kallal (1992, 1995)], economies with solvency constraints [Hindy (1995)], economies with no-short-selling, and economies with any combination of these frictions.

Suggested Citation

  • Zhiwu Chen, 2001. "Viable Costs and Equilibrium Prices in Frictional Securities Markets," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 297-323, November.
    • Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:297-323
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    References listed on IDEAS

    as
    1. He, Hua & Pearson, Neil D., 1991. "Consumption and portfolio policies with incomplete markets and short-sale constraints: The infinite dimensional case," Journal of Economic Theory, Elsevier, vol. 54(2), pages 259-304, August.
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    Cited by:

    1. Arturo Bris & William N. Goetzmann & Ning Zhu, 2007. "Efficiency and the Bear: Short Sales and Markets Around the World," Journal of Finance, American Finance Association, vol. 62(3), pages 1029-1079, June.
    2. Vedolin, Andrea & Korsaye, Sofonias Alemu & Trojani, Fabio, 2020. "The Global Factor Structure of Exchange Rates," CEPR Discussion Papers 15337, C.E.P.R. Discussion Papers.
    3. Arturo Bris & William Goetzmann & Ning Zhu, 2004. "Efficiency and the Bear: Short Sales and Markets around the World," Yale School of Management Working Papers ysm327, Yale School of Management, revised 01 Feb 2005.

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    More about this item

    Keywords

    Frictional markets; Viable price system; No arbitrage; Free lunches; Sublinear price functional; Market frictions;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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