On the existence of shadow prices

DOI10.1007/S00780-012-0201-4zbMATH Open1280.91070arXiv1111.6633OpenAlexW2164546915MaRDI QIDQ377456FDOQ377456

Authors: Giuseppe Benedetti, Luciano Campi, Jan Kallsen, Johannes Muhle-Karbe 

Publication date: 6 November 2013

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: For utility maximization problems under proportional transaction costs, it has been observed that the original market with transaction costs can sometimes be replaced by a frictionless "shadow market" that yields the same optimal strategy and utility. However, the question of whether or not this indeed holds in generality has remained elusive so far. In this paper we present a counterexample which shows that shadow prices may fail to exist. On the other hand, we prove that short selling constraints are a sufficient condition to warrant their existence, even in very general multi-currency market models with possibly discontinuous bid-ask-spreads.

Full work available at URL: https://arxiv.org/abs/1111.6633

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zbMATH Keywords

transaction costsshadow pricesshort selling constraints

Mathematics Subject Classification ID

Portfolio theory (91G10) Utility theory (91B16) Microeconomic theory (price theory and economic markets) (91B24)

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Cited In (17)

• Utility maximization problem with transaction costs: optimal dual processes and stability
• The shadow economy as an equilibrium outcome
• Necessary conditions for the existence of utility maximizing strategies under transaction costs
• Duality theory for portfolio optimisation under transaction costs
• Optimal strategies for utility from terminal wealth with general bid and ask prices
• Utility maximization problem with random endowment and transaction costs: when wealth may become negative
• Existence of shadow prices in finite probability spaces
• Shadow price in the power utility case
• On the existence of shadow prices for optimal investment with random endowment
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• Shadow prices for continuous processes
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• On the game interpretation of a shadow price process in utility maximization problems under transaction costs

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