Author : Dong Chul Won
Publisher :
ISBN 13 :
Total Pages : 57 pages
Book Rating : 4.:/5 (129 download)
Book Synopsis Arbitrage Pricing and the Existence of Equilibrium Under Portfolio Constraints by : Dong Chul Won
Download or read book Arbitrage Pricing and the Existence of Equilibrium Under Portfolio Constraints written by Dong Chul Won and published by . This book was released on 2003 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: Market frictions create portfolios of complicated nature, constrained zero-income portfolios. They generate no income in the future contingencies but matter to risk sharing whether they are mispriced or not. The no arbitrage conditions of the literature may not be qualified for equilibrium conditions in the presence of constrained zero-income portfolios. Thus 'pricing by arbitrage' is far from completely characterizing asset pricing relations. The purpose of this paper is to provide a unified treatment of both asset pricing and equilibrium when asset markets are subject to portfolio constraints. In particular, 'projective arbitrage' is proposed to examine both asset pricing and the existence of equilibrium under portfolio constraints. To formulate the effect of constrained zero-income portfolios on asset pricing and equilibrium, we introduce the local and global laws of one price as an extension of the law of one price to the case with portfolio constraints. The global law of one price is identified as 'pricing by projective arbitrage.' Moreover, the global law of one price provides an important criterion for judging the capability of various notions of arbitrage to characterize equilibrium asset prices under portfolio constraints. The traditional approach to general equilibrium with incomplete markets breaks down in the face of market frictions simply because the law of one price fails.