Admissible Trading Strategies under Transaction Costs

A well known result in stochastic analysis reads as follows: for an $\mathbb{R}$-valued super-martingale $X = (X_t)_{0\leq t \leq T}$ such that the terminal value $X_T$ is non-negative, we have that the entire process $X$ is non-negative. An analogous result holds true in the no arbitrage theory of mathematical finance: under the assumption of no arbitrage, a portfolio process $x+(H\cdot S)$ verifying $x+(H\cdot S)_T\geq 0$ also satisfies $x+(H\cdot S)_t\geq 0,$ for all $0 \leq t \leq T$. In the present paper we derive an analogous result in the presence of transaction costs. A counter-example reveals that the consideration of transaction costs makes things more delicate than in the frictionless setting.

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