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FTAP in finite discrete time with transaction costs by utility maximization

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  • Jörn Sass
  • Martin Smaga

Abstract

The aim of this paper is to prove the fundamental theorem of asset pricing (FTAP) in finite discrete time with proportional transaction costs by utility maximization. The idea goes back to L.C.G. Rogers’ proof of the classical FTAP for a model without transaction costs. We consider one risky asset and show that under the robust no-arbitrage condition, the investor can maximize his expected utility. Using the optimal portfolio, a consistent price system is derived. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Jörn Sass & Martin Smaga, 2014. "FTAP in finite discrete time with transaction costs by utility maximization," Finance and Stochastics, Springer, vol. 18(4), pages 805-823, October.
    • Handle: RePEc:spr:finsto:v:18:y:2014:i:4:p:805-823
    DOI: 10.1007/s00780-014-0241-z
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    References listed on IDEAS

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    1. Schachermayer, W., 1992. "A Hilbert space proof of the fundamental theorem of asset pricing in finite discrete time," Insurance: Mathematics and Economics, Elsevier, vol. 11(4), pages 249-257, December.
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    3. Jakša Cvitanić & Ioannis Karatzas, 1996. "Hedging And Portfolio Optimization Under Transaction Costs: A Martingale Approach12," Mathematical Finance, Wiley Blackwell, vol. 6(2), pages 133-165, April.
    4. Griselda Deelstra & Huyên Pham & Nizar Touzi, 2001. "Dual formulation of the utility maximisation problem under transaction costs," ULB Institutional Repository 2013/7596, ULB -- Universite Libre de Bruxelles.
    5. Miklos Rasonyi & Lukasz Stettner, 2005. "On utility maximization in discrete-time financial market models," Papers math/0505243, arXiv.org.
    6. (**), Christophe Stricker & (*), Miklós Rásonyi & Yuri Kabanov, 2002. "No-arbitrage criteria for financial markets with efficient friction," Finance and Stochastics, Springer, vol. 6(3), pages 371-382.
    7. Giuseppe Benedetti & Luciano Campi, 2011. "Multivariate utility maximization with proportional transaction costs and random endowment," Working Papers hal-00586377, HAL.
    8. Walter Schachermayer, 2004. "The Fundamental Theorem of Asset Pricing under Proportional Transaction Costs in Finite Discrete Time," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 19-48, January.
    9. Luciano Campi & Mark Owen, 2011. "Multivariate utility maximization with proportional transaction costs," Finance and Stochastics, Springer, vol. 15(3), pages 461-499, September.
    10. repec:dau:papers:123456789/2318 is not listed on IDEAS
    11. Christoph Czichowsky & Johannes Muhle-Karbe & Walter Schachermayer, 2012. "Transaction Costs, Shadow Prices, and Duality in Discrete Time," Papers 1205.4643, arXiv.org, revised Jan 2014.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Christoph Kuhn, 2023. "The fundamental theorem of asset pricing with and without transaction costs," Papers 2307.00571, arXiv.org, revised Aug 2024.
    2. Romain Blanchard & Laurence Carassus & Miklós Rásonyi, 2018. "No-arbitrage and optimal investment with possibly non-concave utilities: a measure theoretical approach," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 88(2), pages 241-281, October.

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    More about this item

    Keywords

    Proportional transaction costs; Arbitrage; Consistent price system; Fundamental theorem of asset pricing; Utility; 91B24; 91B16; 91G10; G11; G13;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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