Carvajal, Andrés M. and Weretka, Marek (2012) No-arbitrage, state prices and trade in thin financial markets. Economic Theory, Vol.50 (No.1). pp. 223-268. doi:10.1007/s00199-010-0567-5 ISSN 0938-2259.

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Abstract

We examine how non-competitiveness in financial markets affects the choice of asset portfolios and the determination of equilibrium prices. In our model, potential arbitrage is conducted by a few highly specialized institutional investors who recognize and estimate the impact of their trades on financial prices. We apply a model of economic equilibrium, based on Weretka (http://www.ssc.wisc.edu/~mweretka/Research, 2007a), in which price effects are determined endogenously as part of the equilibrium concept. For the case in which markets allow for perfect insurance, we argue that the principle of no-arbitrage asset pricing is consistent with non-competitive behavior of the arbitragers and extend the fundamental theorem of asset pricing to the non-competitive setting.

Item Type:	Journal Article
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Journal or Publication Title:	Economic Theory
Publisher:	Springer
ISSN:	0938-2259
Official Date:	May 2012
Dates:	Date Event May 2012 Published
Volume:	Vol.50
Number:	No.1
Page Range:	pp. 223-268
DOI:	10.1007/s00199-010-0567-5
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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