The spread between borrowing and lending interest rates is an easy real-world example for
the failure of the law of one price. The arbitrage pricing theory which does not take market
frictions into account may be unable to characterize asset prices in markets which are far
from being ideal. This paper establishes the fundamental theorem of asset pricing (FTAP)
with market frictions such as taxes and transaction costs by introducing a unifying notion
of arbitrage. First of all, we show that the existence of pricing rules is equivalent to the
absence of arbitrage. Moreover, pricing rules satisfy the no arbitrage condition if and only
if they are viable. The first result has important implications for asset valuation as well
as testability of arbitrage pricing theory while the second one vindicates the coherence of
arbitrage as a conceptual framework for equilibrium analysis. A distinct advantage of the
paper over the literature is minimal information requirement to capture the pricing rules.
KEYWORDS: The fundamental theorem of asset pricing, arbitrage, taxes, transaction costs, equilibrium.
[2005년 제 4차] The fundamental theorem of asset pricing with taxes
작성자 : 관리자
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게시일 :
2005-10-18
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