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A Decision Theoretic Approach to Bid-Ask Spreads

Author

Listed:
  • Kast, R.
  • Lapied, A.
Abstract
Preorder representation results are applied to a normative valuation theory for dealers setting bid-ask spreads in a dynamic framework. The preorders induced by ask and bid prices of marketed assets should satisfy some axioms in order for prices not to yield arbitrage opportunities to traders and not to be such that assets could have zero demands. In a discrete time dynamic model for marketed assets with comonotone payoffs (e.g. markets for options on an underlying security or bond markets) the price functional at each date is shown to be a Choquet integral of discounted asset payoffs next period. Such Bid-ask spreads amount for inventory risk.

Suggested Citation

  • Kast, R. & Lapied, A., 1997. "A Decision Theoretic Approach to Bid-Ask Spreads," G.R.E.Q.A.M. 97a17, Universite Aix-Marseille III.
    • Handle: RePEc:fth:aixmeq:97a17
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    Citations

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    Cited by:

    1. Alain Chateauneuf & Robert Kast & André Lapied, 2001. "Conditioning Capacities and Choquet Integrals: The Role of Comonotony," Theory and Decision, Springer, vol. 51(2), pages 367-386, December.
    2. Robert Kast & André Lapied, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers halshs-00533826, HAL.
    3. Roger, Patrick, 2000. "Properties of bid and ask reservation prices in the rank-dependent expected utility model," Journal of Mathematical Economics, Elsevier, vol. 34(3), pages 269-285, November.
    4. André Lapied & Robert Kast, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers 10-21, LAMETA, Universtiy of Montpellier, revised 2010.
    5. Trabelsi, Mohamed Ali, 2010. "Choix de portefeuille: comparaison des différentes stratégies [Portfolio selection: comparison of different strategies]," MPRA Paper 82946, University Library of Munich, Germany, revised 01 Dec 2010.
    6. Robert Kast & André Lapied, 2010. "Dynamically consistent Choquet random walk and real investments," Working Papers hal-02817702, HAL.

    More about this item

    Keywords

    INFORMATION ; PRICING;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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