ABSTRACT
In financial theory, whenever markets are complete, the assumptions of no arbitrage and no frictions enable asset values to be represented with a linear functional of their discounted future payments. Moreover, the price of an asset can be regarded as the formation cost of a replicating portfolio of marketed assets. Thus financial market failures, such as price booms and crashes, excess volatility of asset prices, portfolio rigidity, bid and ask spreads and violation of call and put parity cannot be explained unless “market imperfections,” such as transaction costs, restricted short-sales, asymmetric information and market incompleteness are assumed.
