Rational Asset Pricing Implications from Realistic Trading Frictions

27 Pages Posted: 22 Mar 2002

See all articles by Jean-Pierre Zigrand

Jean-Pierre Zigrand

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group

Date Written: October 2001

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 Classification: G11, G12, G14

Suggested Citation

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

Jean-Pierre Zigrand (Contact Author)

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group ( email )

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

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