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Asian Review of Financial Research, Vol., No..
pp.260~275
pp.260~275
Dynamic Arbitrage Pricing with Return-Related Market Frictions.
Dong Chul Won College of Business Administration Ajou University
The paper presents the fundamental theorem of asset pricing (FTAP) in multiperiod asset markets with return-related market frictions such as capital income taxes and transaction costs. Specifically, we show the triple equivalence between the no arbitrage condition, the existence of pricing rules, and the viability of asset prices. The net returns of assets are assumed to be a concave function of portfolios. This assumption subsumes progressive income taxes and convex transaction costs as a special case. Remarkably, the pricing rules are determined by the lowest and highest net returns and thus, characterized as simply as in the case with proportional tax schemes and transaction costs. The result is in sharp contrast to equilibrium pricing models where prices depend on hard-to-observe quantities such as nonlinear marginal net returns.
Dong Chul Won
The paper presents the fundamental theorem of asset pricing (FTAP) in multiperiod asset markets with return-related market frictions such as capital income taxes and transaction costs. Specifically, we show the triple equivalence between the no arbitrage condition, the existence of pricing rules, and the viability of asset prices. The net returns of assets are assumed to be a concave function of portfolios. This assumption subsumes progressive income taxes and convex transaction costs as a special case. Remarkably, the pricing rules are determined by the lowest and highest net returns and thus, characterized as simply as in the case with proportional tax schemes and transaction costs. The result is in sharp contrast to equilibrium pricing models where prices depend on hard-to-observe quantities such as nonlinear marginal net returns.
The fundamental theorem of asset pricing,arbitrage,viable prices,income taxes,transaction costs.
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