NO-ARBITRAGE PRICING FOR DIVIDEND-PAYING SECURITIES IN DISCRETE-TIME MARKETS WITH TRANSACTION COSTS

Authors


  • Tomasz R. Bielecki and Igor Cialenco acknowledge support from the NSF grant DMS-0908099. The authors thank the anonymous referees and the associate editor for their helpful comments and suggestion.

Abstract

We prove a version of First Fundamental Theorem of Asset Pricing under transaction costs for discrete-time markets with dividend-paying securities. Specifically, we show that the no-arbitrage condition under the efficient friction assumption is equivalent to the existence of a risk-neutral measure. We derive dual representations for the superhedging ask and subhedging bid price processes of a contingent claim contract. Our results are illustrated with a vanilla credit default swap contract.

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