IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v28y1993i01p65-80_00.html
   My bibliography  Save this article

No Arbitrage and Valuation in Markets with Realistic Transaction Costs

Author

Listed:
  • Dermody, Jaime Cuevas
  • Prisman, Eliezer Z.

Abstract

One of the most fundamental results in finance is the equivalence of a no-arbitrage condition to the existence of a pricing operator in markets without transaction costs (see Ross (1978)). Garman and Ohlson (1981) extended this to markets with proportional transaction costs. The current paper further extends this result to markets with realistic (and nonproportional) transaction costs. These costs include all investors' market-impact and short-borrowing costs, large investors' institutional commissions, and for small investors only the additional cost of retail commissions. They are functions of the value of the trade and have increasing, increasing, constant, and decreasing marginal rates, respectively, in that value. Garman and Ohlson showed that equilibrium prices in their notion of a “corresponding” cost-free market, plus a certain factor, prevail under equilibrium in markets with proportional transaction costs. The current paper extends this to realistic transaction costs and establishes the functional relation between this factor and the form of such costs.

Suggested Citation

  • Dermody, Jaime Cuevas & Prisman, Eliezer Z., 1993. "No Arbitrage and Valuation in Markets with Realistic Transaction Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 65-80, March.
    • Handle: RePEc:cup:jfinqa:v:28:y:1993:i:01:p:65-80_00
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S002210900000836X/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bettzuge, Marc Oliver & Hens, Thorsten & Laitenberger, Marta & Siwik, Thomas, 2000. "On Choquet prices in a GEI-model with intermediation costs," Research in Economics, Elsevier, vol. 54(2), pages 133-152, June.
    2. Valeriy Zakamulin, 2014. "The real-life performance of market timing with moving average and time-series momentum rules," Journal of Asset Management, Palgrave Macmillan, vol. 15(4), pages 261-278, August.
    3. Xiaotie Deng & Zhong Li & Shouyang Wang & Hailiang Yang, 2005. "Necessary and Sufficient Conditions for Weak No-Arbitrage in Securities Markets with Frictions," Annals of Operations Research, Springer, vol. 133(1), pages 265-276, January.
    4. Stefan Jaschke & Richard Stehle & Stephan Wernicke, 2000. "Arbitrage und die Gültigkeit des Barwertprinzips im Markt für Bundeswertpapiere," Schmalenbach Journal of Business Research, Springer, vol. 52(5), pages 440-468, August.
    5. Gianluca Cassese, 2014. "Option Pricing in an Imperfect World," Papers 1406.0412, arXiv.org, revised Sep 2016.
    6. X. Chao & K. Lai & Shou-Yang Wang & Mei Yu, 2005. "Optimal Consumption Portfolio and No-Arbitrage with Nonproportional Transaction Costs," Annals of Operations Research, Springer, vol. 135(1), pages 211-221, March.
    7. Kallio, Markku & Ziemba, William T., 2007. "Using Tucker's theorem of the alternative to simplify, review and expand discrete arbitrage theory," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2281-2302, August.
    8. Ardalan, Kavous, 1999. "The no-arbitrage condition and financial markets with transaction costs and heterogeneous information: The bid-ask spread," Global Finance Journal, Elsevier, vol. 10(1), pages 83-91.
    9. Valeri Zakamouline, 2003. "European Option Pricing and Hedging with both Fixed and Proportional Transaction Costs," Finance 0311009, University Library of Munich, Germany.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:28:y:1993:i:01:p:65-80_00. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.