Pricing issues with investment flows - Applications to market models with frictions

In this paper, we study some foundational. issues in the theory of asset pr icing. We consider a model where any investment opportunity is described in terms of cash flows. We do not assume that there is a numeraire, the time horizon is not supposed to be finite, the investment opportunities are not specifically related to the buying and selling of securities on a financial market. In this quite general framework, we consider different possible de finitions of admissible prices for a contingent flow, mainly related to arb itrage and equilibrium considerations, and for each possible definition, we characterize the set of admissible prices. Since most market imperfections, such as short sale constraints, convex con e constraints, proportional transaction costs, no borrowing or different bo rrowing and lending rates, etc., can fit in the preceding model for a speci fic set of investment opportunities, our approach with flows provides a uni fied framework far the study of pricing issues in market models with fricti ons (including imperfections on the numeraire). We generalize existing resu lts and we obtain them ah in a unified way. (C) 2001 Elsevier Science B.V. All rights reserved.