IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v17y2014i05ns0219024914500307.html
   My bibliography  Save this article

Binary Markets Under Transaction Costs

Author

Listed:
  • FERNANDO CORDERO

    (Faculty of Technology, University of Bielefeld, Universitätsstrasse 25, U4-151, Bielefeld 33615, Germany)

  • IRENE KLEIN

    (Department of Statistics and Operations Research, University of Vienna, Oskar-Morgerstern-Platz 1, Vienna 1090, Austria)

  • LAVINIA PEREZ-OSTAFE

    (Department of Mathematics, ETH Zurich, Rämistrasse 101, Zurich 8092, Switzerland)

Abstract

The goal of this work is to study binary market models with transaction costs, and to characterize their arbitrage opportunities. It has been already shown that the absence of arbitrage is related to the existence of λ-consistent price systems (λ-CPS), and, for this reason, we aim to provide conditions under which such systems exist. More precisely, we give a characterization for the smallest transaction cost λc (called "critical" λ) starting from which one can construct a λ-CPS. We also provide an expression for the set $\mathcal{M}(\lambda)$ of all probability measures inducing λ-CPS. We show in particular that in the transition phase "λ = λc" these sets are empty if and only if the frictionless market admits arbitrage opportunities. As an application, we obtain an explicit formula for λc depending only on the parameters of the model for homogeneous and also for some semi-homogeneous binary markets.

Suggested Citation

  • Fernando Cordero & Irene Klein & Lavinia Perez-Ostafe, 2014. "Binary Markets Under Transaction Costs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(05), pages 1-27.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:05:n:s0219024914500307
    DOI: 10.1142/S0219024914500307
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024914500307
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024914500307?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

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


    Cited by:

    1. Svetlozar Rachev & Nancy Asare Nyarko & Blessing Omotade & Peter Yegon, 2023. "Bachelier's Market Model for ESG Asset Pricing," Papers 2306.04158, arXiv.org.
    2. Davide Lauria & W. Brent Lindquist & Svetlozar T. Rachev & Yuan Hu, 2023. "Unifying Market Microstructure and Dynamic Asset Pricing," Papers 2304.02356, arXiv.org, revised Feb 2024.

    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:wsi:ijtafx:v:17:y:2014:i:05:n:s0219024914500307. 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: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    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.