Finance theory’s core models assume frictionless markets with no transaction costs or short-selling penalties

Evidence

Typically, those assumptions involve matters such as the following: that stocks and other financial assets can be bought and sold at prevailing market prices without affecting those prices, that no commissions or other “transaction costs” are incurred in so doing, that stocks can be “sold short” (e.g., borrowed and sold, and later repurchased and returned) freely and without penalty, and that money can be borrowed and can be lent at the same “riskless” rate of interest. — Donald MacKenzie, An Engine, Not a Camera, 51

Categorization

• DEFINE: Sets up the standard idealizing assumptions of asset pricing models that the performativity argument must grapple with.
• XREF: connects to: Black-Scholes pricing rests on idealized no-friction market assumptions. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 627; Constrained arbitrage allows finance-theory models to diverge from actual prices. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1213; The Black-Scholes formula contains no risk parameter, implying risk-neutral pricing. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 598

Broader Connections

• Black-Scholes pricing rests on idealized no-friction market assumptions. #corroborates (0.95) — Donald MacKenzie, An Engine, Not a Camera, 627
• Constrained arbitrage allows finance-theory models to diverge from actual prices. #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1213