Zigrand, Jean-Pierre (2005) Rational asset pricing implications from realistic trading frictions. Journal of business, 78 (3). pp. 871-892. ISSN 0740-9168
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.
|Additional Information:||© 2005 University of Chicago Press|
|Library of Congress subject classification:||H Social Sciences > HF Commerce|
|Sets:||Departments > Accounting and Finance|
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