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I see a lot of theorems related to tradable assets in quantitative finance text books.

What is a tradable asset? What does 'tradable' mean exactly? Does it simply mean the asset can be bought and sold in the market? Any example of non-tradable asset?

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The concept of a tradable asset is closely related to the principle of (no-)arbitrage. Much of quant finance is about the connection between the price of a derivative and the price of its underlying. The fundamental reason that there is a connection at all, is the possibility to set up self-financing trading strategies in the underlying(s) which replicate the pay-out of certain derivatives. If you look at the definition of self-financing strategies you will notice that you need to be able to buy and sell the underlying at any time, instantaneously in unlimited quantity, without any transaction costs. So this is a tradable asset within the mathematical theory.

Of course this is mathematical fiction and imposes an important restriction on the applicability of mathematical finance to the real world. But from my (limited) experience more realistic assumptions quickly become messy and really difficult.

In my opinion being tradable in the real world is not black and white but a gradual thing. So some examples in descending order of tradability: Bank deposits, S&P futures, derivatives on the ABX index , your house(or car or bicycle), the Sistine Chapel.

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  • $\begingroup$ Why would bank deposits be more tradable than S&P futures? You mean cash? $\endgroup$ – SRKX Mar 6 '15 at 9:24
  • $\begingroup$ Yes, my first thought was cash but I removed it. What is cash? If you think of physical notes made from paper then those would not fulfill the requirements of tradable assets. So a tradable asset should be electronic at least. And in comparison to S&P futures, where would the funds for a trade in those come from? But it is clear that bank deposits imply credit risk and this limits tradability. I am no expert on these more payment and settlement related questions and open to better suggestions. It might even make a good followup question. $\endgroup$ – g g Mar 6 '15 at 10:03
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    $\begingroup$ +1 for the reminder that quantitative finance models often have some problems existing in the dirty world of reality. $\endgroup$ – Eric Mar 7 '15 at 17:00
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An example:

Non-tradable asset: VIX index; Tradable assets: VIX Futures, VIX Options

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    $\begingroup$ +1. More basic: interest rates or FX rates are not tradeable but Cash (currency) and Bonds are. $\endgroup$ – AFK Mar 10 '15 at 21:59

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