Asset pricing and hedging in financial markets with transaction costs: an approach based on the von Neumann-Gale model

The paper develops a general discrete-time framework for asset pricing and hedging in financial markets with proportional transaction costs and trading constraints. The framework is suggested by analogies between dynamic models of financial markets and (stochastic versions of) the von Neumann-Gale model of economic growth. The main results are hedging criteria stated in terms of "dual variables" -- consistent prices and consistent discount factors. It is shown how these results can be applied to a number of specialized models involving transaction costs and portfolio restrictions.