Arbitrage-Free Price-Update and Price-Impact Functions

49 Pages Posted: 11 Dec 2000

See all articles by Werner Stanzl

Werner Stanzl

Yale University - International Center for Finance

Gur Huberman

Columbia Business School - Finance and Economics

Date Written: October 7, 2000

Abstract

Consider a trading environment where trading volume affects security prices. We show that when the price impact is time stationary, only linear price-impact functions rule out arbitrage. This is true whether a single asset or a portfolio of assets is traded. When the temporary and permanent effects of trades on prices are independent, only the permanent price impact must be linear while the temporary one can be of a more general form. We also examine what arbitrage-free temporary and permanent price impacts must look like in a nonstationary framework.

JEL Classification: D40, G12

Suggested Citation

Stanzl, Werner and Huberman, Gur, Arbitrage-Free Price-Update and Price-Impact Functions (October 7, 2000). Yale ICF and Yale SOM Working Paper No. 00-20, Available at SSRN: https://ssrn.com/abstract=249963 or http://dx.doi.org/10.2139/ssrn.249963

Werner Stanzl (Contact Author)

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520-8200
United States
203-436-0666 (Phone)
203-436-0630 (Fax)

HOME PAGE: http://som.yale.edu/~ws69

Gur Huberman

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
727
Abstract Views
5,077
rank
37,540
PlumX Metrics