Choosing a valuation operator for pricing assets with long-short spreads: The impact of transaction costs and taxes

This paper articulates two general approaches to no-arbitrage asset pricing in a market with transaction costs and taxes. Prior work recognises a multiplicity of valuation operators by either ruling out the consideration of investors' preferences or ignoring the term structure of valuation operators in the presence of market frictions. While investors may belong to different tax classes, a legitimate question has been raised regarding which valuation operator should be used by an individual investor. The analysis links the convex structure of valuation operators to investors' marginal utilities at the optimal consumption level. It establishes a principle for choosing a valuation operator from among a multiplicity of operators for a tax-class specific investor