In a frictionless market
all economic agents have the same access to information.
Henry Cao, University of North Carolina, and Hui Ou-Yang, Duke University, "Bubbles and Panics in a Frictionless Market
with Heterogeneous Expectations"
In a frictionless market, the individual would be indifferent between a mortality swap and a bank deposit.
The article is organized as follows: the next section analyzes a mortality swap in a frictionless market.
In a frictionless market, the rate of return on a mortality swap is equal to the risk-free rate; i.
In a frictionless market, the assumption of no arbitrage is essentially equivalent to the existence of a stochastic discount factor [m.
It can also be derived from agent optimality: if an insatiable investor trades in a frictionless market, his optimal portfolio choice problem only has a solution in the absence of arbitrage--otherwise he will make an arbitrarily large profit and consume an arbitrarily large amount.
Solvable and frictionless markets
are populated by rational agents, which are then subjected to perturbations in an effort to recover economic realism.
Schaefer, 1984, "Continuous Price Processes in Frictionless Markets
Have Infinite Variation", Journal of Business, 57:353-365
These findings are driven by how bidders self-select across markets: Better-informed bidders select frictional markets while uninformed, pessimistic bidders select the safety of frictionless markets
Objective: For the past twenty years, Mathematical Finance has grown from the perfect fit between martingale methods and models of frictionless markets