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Asset Pricing and Hedging in Financial Markets with Transaction Costs: An Approach Based on the Von Neumann–Gale Model |
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| Authors: | M A H Dempster I V Evstigneev M I Taksar |
| Institution: | (1) Centre for Financial Research, Judge Business School, University of Cambridge, Trumpington Street, Cambridge, CB2 1AG, UK;(2) Economics Department, University of Manchester, Oxford Road, Manchester, M13 9PL, UK;(3) Mathematics Department, University of Missouri, Columbia, MO 65211, USA |
| Abstract: | The paper develops a general discrete-time framework for asset pricing and hedging in financial markets with proportional transaction costs and trading constraints. The framework is suggested by analogies between dynamic models of financial markets and (stochastic versions of) the von Neumann–Gale model of economic growth. The main results are hedging criteria stated in terms of “dual variables” – consistent prices and consistent discount factors. It is shown how these results can be applied to specialized models involving transaction costs and portfolio restrictions. |
| Keywords: | Asset pricing Hedging Transaction costs Trading constraints Von Neumann– Gale model Consistent valuation systems |
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