NO MARGINAL ARBITRAGE OF THE SECOND KIND FOR HIGH PRODUCTION REGIMES IN DISCRETE TIME PRODUCTION–INVESTMENT MODELS WITH PROPORTIONAL TRANSACTION COSTS

Authors


  • This research is part of the Chair Finance and Sustainable Development sponsored by EDF and Calyon, and the Chair Les particuliers face au risque sponsored by Groupama. Adrien Nguyen Huu expresses his gratitude to EDF R&D and FiME Laboratoire de Finance des Marchés d’Énergies for its financial support. Both authors are grateful to the anonymous referees for their valuable comments.

Adrien Nguyen Huu, Université Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France; e-mail: nguyen@ceremade.dauphine.fr.

Abstract

We consider a class of production–investment models in discrete time with proportional transaction costs. For linear production functions, we study a natural extension of the no-arbitrage of the second kind condition introduced by Rásonyi. We show that this condition implies the closedness of the set of attainable claims and is equivalent to the existence of a strictly consistent price system under which the evaluation of future production profits is strictly negative. This allows us to discuss the closedness of the set of terminal wealth in models with nonlinear production, functions which may admit arbitrages of the second kind for low production regimes but not marginally for high production regimes.

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