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Rational asset pricing implications from realistic trading frictions

Zigrand, Jean-Pierre (2005) Rational asset pricing implications from realistic trading frictions. Journal of Business, 78 (3). pp. 871-892. ISSN 0740-9168

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Abstract

We study a simple rational expectations (RE) model whose asset pricing implications address some of the short-run mispricings, informational inefficiencies, and overreactions observed in real markets, without a need to resort to behavioral assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk and asset-specific orders. We show that arbitrage opportunities occur at the RE equilibrium that could not have occurred in a standard model. A certain degree of informativeness of prices to the traders is lost, leading to a decentralization and coordination problem. Asset prices are shown to overreact as a result.

Item Type: Article
Official URL: http://www.journals.uchicago.edu/JB
Additional Information: © 2005 University of Chicago Press
Library of Congress subject classification: H Social Sciences > HF Commerce
Sets: Departments > Accounting and Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 19 Sep 2008 14:30
URL: http://eprints.lse.ac.uk/16457/

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