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Asset pricing in an imperfect world

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  • Gianluca Cassese

    (Università Milano Bicocca
    University of Lugano)

Abstract

In a model with no given probability measure, we consider asset pricing in the presence of frictions and other imperfections and characterize the property of coherent pricing, a notion related to (but much weaker than) the no-arbitrage property. We show that prices are coherent if and only if the set of pricing measures is non-empty, i.e., if pricing by expectation is possible. We then obtain a decomposition of coherent prices highlighting the role of bubbles. Eventually, we show that under very weak conditions, the coherent pricing of options implies a very clear representation which permits, as in Breeden and Litzenberger (J Bus 51:621–651, 1978), to extract the implied probability.

Suggested Citation

  • Gianluca Cassese, 2017. "Asset pricing in an imperfect world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(3), pages 539-570, October.
    • Handle: RePEc:spr:joecth:v:64:y:2017:i:3:d:10.1007_s00199-016-0999-7
    DOI: 10.1007/s00199-016-0999-7
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    Cited by:

    1. Gianluca Cassese, 2021. "Complete and competitive financial markets in a complex world," Finance and Stochastics, Springer, vol. 25(4), pages 659-688, October.
    2. Gianluca Cassese, 2019. "Nonparametric Estimates Of Option Prices And Related Quantities," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(07), pages 1-29, November.
    3. Lorenzo Bastianello & Alain Chateauneuf & Bernard Cornet, 2022. "Put-Call Parities, absence of arbitrage opportunities and non-linear pricing rules," Papers 2203.16292, arXiv.org.
    4. Gianluca Cassese, 2015. "Non Parametric Estimates of Option Prices Using Superhedging," Papers 1502.03978, arXiv.org.
    5. Matteo Burzoni & Frank Riedel & H. Mete Soner, 2021. "Viability and Arbitrage Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 89(3), pages 1207-1234, May.

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    More about this item

    Keywords

    Arbitrage; Bid/ask spreads; Bubbles; Coherence; Fundamental theorem of asset pricing; Risk-neutral probability; Transaction costs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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