Publication: Measuring arbitrage profits in imperfect markets
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2000-01
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Abstract
In this paper we introduce a measure testing the degree of efficiency in securities markets with bidask spreads. The measure tests relative arbitrage profits when there are transaction costs on the prices and payoffs of the assets. Moreover, we prove that the measure is the minimum of the measures of efficiency in all frictionless markets where the prices and payoffs lie between the bid and the ask prices and payoffs respectively. In particular, we fmd that the model is arbitrage-free if and only if there exist convex combinations of the bid and the ask prices and payoffs such that the corresponding frictionless model is arbitrage-free.