On the existence of shadow prices (Q377456)

In this paper, the authors tackle the question of existence of a frictionless shadow market under general conditions. The existence of shadow market might be useful in pricing assets on financial markets with transaction costs. They present a counterexample showing that shadow prices may not exist without any further assumptions. Their counterexample is given for a discrete-time market having two assets: a riskless one and a risky one. One the other hand, it is also shown that the presence of short selling constraints is a sufficient condition for the existence of shadow prices, even in general multi-currency markets with random, time-varying and possible discontinuous bid-ask spreads. It is conjectured that shadow prices should always exist for utilities defined on the real line, where there is no solvency constraint that can become binding.