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- Title
BINARY MARKETS UNDER TRANSACTION COSTS.
- Authors
CORDERO, FERNANDO; KLEIN, IRENE; PEREZ-OSTAFE, LAVINIA
- 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 M(λ) 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.
- Subjects
TRANSACTION costs; ECONOMIC models; ARBITRAGE; ECONOMIC opportunities; MATHEMATICAL formulas
- Publication
International Journal of Theoretical & Applied Finance, 2014, Vol 17, Issue 5, p1
- ISSN
0219-0249
- Publication type
Article
- DOI
10.1142/S0219024914500307