When several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly between them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors’...

Much of financial theory neglects transactions costs. Perhaps the most successful implementation of it -- i.e. continuous-time portfolio choice and option pricing -- is downright inconsistent with the existence of any transactions cost at all. Nonetheless prima facie evidence from the trade is...