Fundamental theorem of asset pricing with acceptable risk in markets with frictions

DOI10.1007/S00780-023-00509-XzbMATH Open1520.91409arXiv2012.08351OpenAlexW3214212902WikidataQ122903002 ScholiaQ122903002MaRDI QIDQ6166338FDOQ6166338

Authors: Maria Arduca, Cosimo Munari 

Publication date: 6 July 2023

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

Abstract: We study the range of prices at which a rational agent should contemplate transacting a financial contract outside a given securities market. Trading is subject to nonproportional transaction costs and portfolio constraints and full replication by way of market instruments is not always possible. Rationality is defined in terms of consistency with market prices and acceptable risk thresholds. We obtain a direct and a dual description of market-consistent prices with acceptable risk. The dual characterization requires an appropriate extension of the classical Fundamental Theorem of Asset Pricing where the role of arbitrage opportunities is played by good deals, i.e., costless investment opportunities with acceptable risk-reward tradeoff. In particular, we highlight the importance of scalable good deals, i.e., investment opportunities that are good deals regardless of their volume.

Full work available at URL: https://arxiv.org/abs/2012.08351

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zbMATH Keywords

risk measuresarbitrage pricingtransaction costsportfolio constraintsgood deal pricing

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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Cited In (6)

• Risk measures beyond frictionless markets
• The fundamental theorem of asset pricing under default and collateral in finite discrete time
• An elementary proof of the dual representation of expected shortfall
• Fundamental Theorems of Asset Pricing for Good Deal Bounds
• The fundamental theorem of asset pricing, the hedging problem and maximal claims in financial markets with short sales prohibitions
• Pricing issues with investment flows. Applications to market models with frictions

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