Asset Pricing in the Presence of Market Friction Noise

We present two models for incorporating the total effect of market friction noise into the dynamic pricing of assets and European options. The first model is developed under a continuous-time Black–Scholes–Merton framework. The second model is a discrete, binomial tree model developed as an extension of the static Grossman–Stiglitz model. Both models are market-complete and provide a unique equivalent martingale measure that establishes a unique map between parameters governing the risk-neutral