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Rational Asset Pricing Implications from Realistic Trading Frictions

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  • Jean-Pierre Zigrand

    (London School of Economics)

Abstract

We study a simple rational expectations (RE) model whose asset pricing implications address some of the short-run mispricings, informational inefficiencies, and overreactions observed in real markets, without a need to resort to behavioral assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk and asset-specific orders. We show that arbitrage opportunities occur at the RE equilibrium that could not have occurred in a standard model. A certain degree of informativeness of prices to the traders is lost, leading to a decentralization and coordination problem. Asset prices are shown to overreact as a result.

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  • Jean-Pierre Zigrand, 2005. "Rational Asset Pricing Implications from Realistic Trading Frictions," The Journal of Business, University of Chicago Press, vol. 78(3), pages 871-892, May.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:3:p:871-892
    DOI: 10.1086/429647
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    Cited by:

    1. Zigrand, Jean-Pierre, 2001. "Rational limits to arbitrage," LSE Research Online Documents on Economics 25068, London School of Economics and Political Science, LSE Library.
    2. Milena Wittwer, 2021. "Connecting Disconnected Financial Markets?," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 252-282, February.

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