Valuation of Risky Assets in Arbitrage Free Economies with Frictions

This paper derives a framework for arbitrage models in markets with frictions. It generalizes the existence of a valuation operator to such markets. As in perfect markets, the valuation operator is a linear operator and its existence is implied by the no-arbitrage condition. In imperfect markets the valuation operator is individual-specific and depends on the agent's position in the market. The methodology employed in the paper is duality in convex programming.