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Rational Asset Pricing Implications from Realistic Trading Frictions

Jean-Pierre Zigrand
London School of Economics - Department of Finance and Financial Markets Group

October 2001

EFA 2002 Berlin Meetings Presented Paper

Abstract:
We study a simple rational expectations model whose asset pricing implications address some of the mispricings, informational inefficiencies and overreactions observed in real markets, without a need to resort to behavioural assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk (execution risk) and of asset-specific orders (the demand function for asset 'a' cannot be made contingent on the price of any asset other than 'a'). These induce allocational and informational inefficiencies akin to the ones observed in reality. Furthermore, the decision making entity becomes segmented into distinct "trading desks."

Keywords: Arbitrage, Trading Frictions, Asset Pricing, Informational Inefficiencies

JEL Classifications: G11, G12, G14

Working Paper Series

Date posted: March 22, 2002 ; Last revised: January 22, 2003

Suggested Citation

Zigrand, Jean-Pierre, Rational Asset Pricing Implications from Realistic Trading Frictions (October 2001). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: http://ssrn.com/abstract=302819 or doi:10.2139/ssrn.302819

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Contact Information

Jean-Pierre Zigrand (Contact Author)

London School of Economics - Department of Finance and Financial Markets Group ( email )

Houghton Street
London WC2A 2AE United Kingdom
+44 20 7955 6201 (Phone)
+44 20 7955 7420 (Fax)