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Duality and Arbitrage With Transactions Costs: Theory and Applications

Staff Report 128 | Published November 1, 1989

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Author

Michael J. Stutzer Professor of Finance, University of Iowa

Duality and Arbitrage With Transactions Costs: Theory and Applications

Abstract

Recent advances in duality theory have made it easier to discover relationships between asset prices and the portfolio choices based on them. But this approach to arbitrage-free securities markets has yet to be extended and applied to economies with transactions costs. This paper does so, within the context of a general state-preference model of securities markets. Several applications are developed to illustrate the nature of the theory and its potential to resolve a host of issues surrounding the effects of transactions costs on securities markets.