Title: Market Conditions under Frictions and without Dynamic Spanning

Author: Jussi Keppo

Status: Systems Analysis Laboratory Research Reports A72, February 1998.


 Keywords: Arbitrage, Equilibrium, Incomplete markets, Optimization, Transaction costs

 In this paper we study the conditions for the absence of arbitrage, single agentís optimality, and equilibrium in a market under frictions and with more sources of uncertainty than tradable assets. In other words, we analyze a state-price deflator, i.e., a deflator with the property that the deflated prices of tradable assets are martingales, in the presence of frictions and incompleteness. A unique state-price deflator may exist only on projected markets. It is shown that if the market conditions hold for the projected markets, they hold also for the initial market.