Solvable and frictionless markets
are populated by rational agents, which are then subjected to perturbations in an effort to recover economic realism.
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
Schaefer, 1984, "Continuous Price Processes in Frictionless Markets
Have Infinite Variation", Journal of Business, 57:353-365
The Internet has opened up the possibility of frictionless markets
where groups and individuals can leverage their buying and selling power across large communities of interest," said Tom Glassanos, president of the eBusiness Solutions Division at PeopleSoft.
Objective: For the past twenty years, Mathematical Finance has grown from the perfect fit between martingale methods and models of frictionless markets
In this section, we first relate the theory of liquidity and asset pricing to the standard theory of asset pricing in frictionless markets.
The assumption of frictionless markets is combined with one of the following three concepts: no arbitrage, agent optimality, and equilibrium.
It is, however, important to recognize that the standard no-arbitrage pricing theory relies not only on the absence of arbitrage, but also on the assumption of frictionless markets.
To see why the assumption of frictionless markets is crucial, consider the basic principle of standard asset pricing: securities, portfolios, or trading strategies with the same cash flows must have the same price.
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.