EQUILIBRIUM PRICES IN ECONOMIC EQUILIBRIUM MODELS WITH TRANSACTION COSTS

2016 ◽  
Vol 21 (1) ◽  
pp. 9-16
Author(s):  
E.S. Belyakova ◽  
◽  
N.G. Pavlova ◽  
Keyword(s):  
Transaction Costs ◽  
Economic Equilibrium ◽  
Equilibrium Models ◽  
Equilibrium Prices

A New Decomposition Method for Multiregional Economic Equilibrium Models

2006 ◽  
Vol 54 (4) ◽  
pp. 643-655 ◽  
Author(s):  
William Chung ◽  
J. D. Fuller ◽  
Y. June Wu
Keyword(s):  
Decomposition Method ◽  
Economic Equilibrium ◽  
Equilibrium Models

UNDERSTANDING BID-ASK SPREADS OF DERIVATIVES UNDER UNCERTAIN VOLATILITY AND TRANSACTION COSTS

2001 ◽  
Vol 04 (03) ◽  
pp. 467-489 ◽  
Author(s):  
THIERRY ANÉ ◽  
VINCENT LACOSTE
Keyword(s):  
Transaction Costs ◽  
Portfolio Diversification ◽  
Uncertain Parameters ◽  
Price Determination ◽  
Options Markets ◽  
Hedging Strategy ◽  
Underlying Asset ◽  
Equilibrium Prices ◽  
Bid Ask Spreads ◽  
Random Nature

The classical option valuation models assume that the option payoff can be replicated by continuously adjusting a portfolio consisting of the underlying asset and a risk-free bond. This strategy implies a constant volatility for the underlying asset and perfect markets. However, the existence of non-zero transaction costs, the consequence of trading only at discrete points in time and the random nature of volatility prevent any portfolio from being perfectly hedged continuously and hence suppress any hope of completely eliminating all risks associated with derivatives. Building upon the uncertain parameters framework we present a model for pricing and hedging derivatives where the volatility is simply assumed to lie between two bounds and in the presence of transaction costs. It is shown that the non-arbitrageable prices for the derivatives, which arise in this framework, can be derived by a non-linear PDE related to the convexity of the derivatives. We use Monte Carlo simulations to investigate the error in the hedging strategy. We show that the standard arbitrage is exposed to such large risks and transaction costs that it can only establish very wide bounds on equilibrium prices, obviously in contradiction with the very tight bid-ask spreads of derivatives observed on the market. We explain how the market spreads can be compatible with our model through portfolio diversification. This has important implications for price determination in options markets as well as for testing of valuation models.

A Decomposition Approach for a Class of Economic Equilibrium Models

1998 ◽  
Vol 46 (3) ◽  
pp. 368-377 ◽  
Author(s):  
Frederic H. Murphy ◽  
Murthy V. Mudrageda
Keyword(s):  
Economic Equilibrium ◽  
Equilibrium Models ◽  
Decomposition Approach

Contracting Strategies in Entrepreneurial and Established Firms

1994 ◽  
Vol 18 (3) ◽  
pp. 43-59 ◽  
Author(s):  
Roger L. Hudson ◽  
Angeline W. McArthur
Keyword(s):  
Transaction Costs ◽  
Governance Structure ◽  
Environmental Context ◽  
Economic Equilibrium ◽  
Entrepreneurial Firms ◽  
Firm Success ◽  
General Contracting ◽  
Established Firms ◽  
Contracting Model

Entrepreneurial and established firms need different contracting strategies because they operate in different environments. Established firms operate in an environment of economic equilibrium, whereas entrepreneurial firms operate in an environment of economic disequilibrium. A general contracting model is developed that takes into account risk, environmental context, governance structure, safeguards, transaction costs, and transaction justice. The model is used to develop hypotheses about how entrepreneurial and established firms’ contracting strategies differ and how contracting strategies lead to firm success or failure.

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