Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/67858 
Year of Publication: 
2003
Series/Report no.: 
Queen's Economics Department Working Paper No. 1082
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
This paper presents a unified framework for examining the general equilibrium effects of transactions costs and trading constraints on security market trades and prices. The model uses a discrete time/state framework and Kuhn- Tucker theory to characterize the optimal decisions of consumers and financial intermediaries. Transaction costs and constraints give rise to regions of no trade and to bid-ask spreads: their existence frustrate the derivation of standard results in arbitrage-based pricing. Nevertheless, we are able to obtain as dual characterisations of our primal problems, one-sided arbitrage pricing results and a personalised martingale representation of asset pricing. These pricing results are identical to those derived by Jouini and Kallal (1995) using arbitrage arguments. The paper's framework incorporates a number of specialised existing models and results, proves new results and discusses new directions for research. In particular, we include characterisations of intermediaries who hold optimal portfolios; brokers who do not hold portfolios, and consumer-specific transactions costs and trading constraints. Furthermore we show that in the special case of equiproportional transaction costs and a sufficient number of assets, there is an analogue of the arbitrage pricing result for European derivatives where prices are interpreted as mid-prices between the bid-ask spread. We discuss the effects of non-convex transaction technologies on prices and trades.
Subjects: 
Financial Markets
Transaction Costs
Trading Constraints
Asset Pricing
General Equilibrium
Incomplete Markets
JEL: 
D52
G12
G13
Document Type: 
Working Paper

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