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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:
Page Count: 22
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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.

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