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Duality and arbitrage with transactions costs: theory and applications


Abstract: Recent advances in duality theory have made it easier to discover relationships between asset prices and the portfolio choices based on them. But this approach to arbitrage-free securities markets has yet to be extended and applied to economies with transactions costs. This paper does so, within the context of a general state-preference model of securities markets. Several applications are developed to illustrate the nature of the theory and its potential to resolve a host of issues surrounding the effects of transactions costs on securities markets.

Keywords: Asset-liability management; Arbitrage;

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Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 1989

Number: 128