Your PDF has successfully downloaded.

You may be interested in finding more content on these topics:

Access

You are not currently logged in.

Access JSTOR through your library or other institution:

login

Log in through your institution.

Journal Article

Rational Asset Pricing Implications from Realistic Trading Frictions

Jean‐Pierre Zigrand
The Journal of Business
Vol. 78, No. 3 (May 2005), pp. 871-892
DOI: 10.1086/429647
Stable URL: http://www.jstor.org/stable/10.1086/429647
Page Count: 22
Were these topics helpful?
See somethings inaccurate? Let us know!

Select the topics that are inaccurate.

Cancel
  • Download PDF
  • Add to My Lists
  • Cite this Item
We're having trouble loading this content. Download PDF instead.

Abstract

We study a simple rational expectations (RE) model whose asset pricing implications address some of the short‐run mispricings, informational inefficiencies, and overreactions observed in real markets, without a need to resort to behavioral assumptions. We accomplish this by relying on the plausible joint frictions of immediacy risk and asset‐specific orders. We show that arbitrage opportunities occur at the RE equilibrium that could not have occurred in a standard model. A certain degree of informativeness of prices to the traders is lost, leading to a decentralization and coordination problem. Asset prices are shown to overreact as a result.

Notes and References

This item contains 21 references.

References
  • ['Chopra, Navin, Josef Lakonishok, and Jay R.Ritter. 1992. Measuring abnormal performance. Do stocks overreact? Journal of Financial Economics 31:235–68.']
  • ['Constantinides, George. 1986. Capital market equilibrium with transaction costs. Journal of Political Economy 94, no. 4:842–62.']
  • ['Danielsson, Jón, Hyun Song Shin, and Jean‐Pieree Zigrand. 2004. The impact of risk regulation on price dynamics. Journal of Banking and Finance 28:1069–87.']
  • ['Danielsson, Jón, and Jean‐Pierre Zigrand. 2001. What happens when you regulate risk? Evidence from a simple equilibrium model. Discussion paper 393, Financial Markets Group, London.']
  • ['De Bondt, Werner, and Richard H. Thaler. 1986. Does the stock market overreact? Journal of Finance 40, no. 3:793–807.']
  • ['De Long, Bradford, Andrei Shleifer, Lawrence Summers, and Robert Waldmann. 1990. Noise trader risk in financial markets. Journal of Political Economy 98, no 4:703–38.']
  • ['Dow, James, and Gary Gorton. 1994. Arbitrage chains. Journal of Finance 49, no. 3:819–49.']
  • ['Hong, Harrison, and Jeremy Stein. 1999. A unified theory of underreaction, momentum trading, and overreaction in asset markets. Journal of Finance 54:2143–84.']
  • ['Kyle, Albert. 1985. Continuous auctions and insider trading. Econometrica 53:1315–36.']
  • ['Lucas, Robert. 1972. Expectations and the neutrality of money. Journal of Economic Theory 4:103–24.']
  • ['———. 1990. Liquidity and interest rates. Journal of Economic Theory 50:237–64.']
  • ['Marschak, Jacob, and Roy Radner. 1971. The economic theory of teams. New Haven, CT: Yale University Press.']
  • ['Radner, Roy. 1979. Rational expectations equilibrium: Generic existence and the information revealed by price. Econometrica 47:655–78.']
  • ['———. 1986. Teams. In Decision and organization. Essays in honor of Jacob Marschak, ed. C. B. McGuire and Roy Radner:189–215. St. Paul: University of Minnesota Press.']
  • ['———. 1986. Allocation of a scarce resource under uncertainty: An example of a team. In Decision and organization. Essays in honor of Jacob Marschak, ed C. B. McGuire and Roy Radner:217–36. St. Paul: University of Minnesota Press.']
  • ['Shleifer, Andrei, and Robert Vishny. 1997. The limits of arbitrage. Journal of Finance 52:35–55.']
  • ['Simon, Herbert. 1956. Dynamic programming under uncertainty with a quadratic objective function. Econometrica 24:74–81.']
  • ['Summers, Lawrence. 1986. Does the stock market rationally reflect fundamental values? Journal of Finance 41, no. 3:591–601.']
  • ['Vayanos, Dimitrios. 2003. The decentralization of information processing in the presence of interactions. Review of Economic Studies 70:667–95.']
  • ['Zigrand, Jean‐Pierre. 2001. Common knowledge, coordination and rational limits to arbitrage. Unpublished manuscript, London School of Economics, London.']
  • ['———. 2004. A general equilibrium analysis of strategic arbitrage. Journal of Mathematical Economics 40:929–52.']