Consider a trading environment where trading volume affects security prices. We show that when the price impact is time stationary, only linear price-impact functions rule out arbitrage. This is true whether a single asset or a portfolio of assets is traded. When the temporary and permanent effects

in an order-driven market

how the even-split result changes in a risk-neutral world. We extend Bertsimas and Lo in several other directions by allowing risk aversion, nonstationary price-impact functions,

applications include fixed-income pricing models, with a role for intensity-based models of default, as well as a wide range of option-pricing applications. An illustrative example examines the implications of stochastic volatility and jumps for option valuation. This example highlights the impact on option

that is independent of insider activity. The serial correlation of transaction price dif-ferences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus

Price-Impact Functions Consider a trading environment where trading volume affects security prices. We show that when the price impact is time stationary, only linear price-impact functions rule out arbitrage. This is true whether a single asset or a portfolio of assets is traded. When

This paper examines a model of dynamic price adjustment based on the assumption that information disseminates slowly throughout the population. Compared with the commonly used sticky-price model, this sticky-information model displays three related properties that are more consistent with accepted

We estimate the relative influence of trade versus technology on wages in a "large country" setting, where technological change affects product prices. Trade is measured by the foreign outsourcing of intermediate inputs, while technological change is measured by expenditures on high

prices as a function of volatility. If an option price is given by the market we can invert this relationship to get the implied volatility. If the model were perfect, this implied value would be the same for all option market prices, but reality shows this is not the case. Implied Black

options and foreign currency options. Simulations show that correlation between volatility and the spot asset’s price is important for explaining return skewness and strike-price biases in the Black-Scholes (1973) model. The solution technique is based on characteristic functions and can be applied