Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099736 | Journal of Economic Dynamics and Control | 2006 | 25 Pages |
Abstract
We consider a securities market with bid-ask spreads at any period, including liquidation. Although the minimum-cost super-replication problem is non-linear, we introduce an auxiliary problem that allows us to characterize no-arbitrage via linear programming techniques. We introduce the notion of effective new security and show that effectiveness restricts the no-arbitrage bid and ask prices of a new security to the interval defined by the minimum-cost problem. We discuss in detail the cases in which the boundaries of this interval can be reached without violating no-arbitrage.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Mariagiovanna Baccara, Anna Battauz, Fulvio Ortu,