Asset pricing in an imperfect world

In a model with no given probability measure, we consider asset pricing in the presence of frictions and imperfections and characterize the property of coherent pricing, a notion related to (but weaker than) the no arbitrage... [ view full abstract ]

In a model with no given probability measure, we consider asset pricing in the presence of frictions and imperfections and characterize the property of coherent pricing, a notion related to (but weaker than) the no arbitrage property. Prices are coherent if and only if the set of pricing measures is non empty, i.e. if pricing by expectation is possible. We then decompose coherent prices highlighting the role of bubbles. Eventually we show that under very weak conditions the coherent pricing of options allows for a very clear representation which allows, as in Breeden and Litzenberger, to extract the implied probability.