Description

http://aleplasmati.comuv.com/?page_id=2

Alessandro Plasmati's final thesis for the Master of Science in Finance at Bocconi University, Milan, Italy.

The purpose of this work is to analyze extensions of linear pricing models which
incorporate a great deal of characteristics of real life prices, which can be generally
referred to as transaction costs.
Linear prices can not account for the presence of frictions in the assets traded on
the market, and the presence of prices that allow for arbitrages creates the possibility
to set up trading strategies resulting in unbounded profits. The absence of any form
of transaction costs and the possibility to scale the size of a trade without any effect
on the price of the transaction are two assumptions that oversimplify the price
system and can be relaxed.
The properties of subadditivity and positive homogeneity that characterize sub-
linear prices allow for the construction of a price system in which it is possible to
differentiate between bid and ask prices, leading to a more realistic model in which
arbitrages are more difficult because of frictions, and a weaker form of price incon-
sistency arises, namely the possibility of convenient super-replications. We expand
the concept of internal consistency of a price system to the case where the riskless
asset is affected by frictions and impose conditions on prices quoted on the market
so that arbitrages and super-replications are not allowed.