[2006 June] Volume17 Issue2, 21-53 The Fundamental Theorem of Asset Pricing with Convex Transaction Costs Dongchul Won College of Business Administration, Ajou University Abstract The paper establishes the fundamental theorem of asset pricing (FTAP) with convex transaction costs. The arbitrage pricing rules are independent of the marginal effect of transaction costs and determined by average costs for large transactions. This implies that the pricing rules are characterized by minimal information on the nature of transaction costs. Remarkably, no matter how complex the convex transaction cost functions are, the pricing rules are as simple and concrete as in the case with proportional transaction costs. This result is in sharp contrast to equilibrium pricing theory based upon the knowledge of the marginal effect of transaction costs and therefore, of transaction cost functions. Moreover, the no arbitrage condition is equivalent to viability of asset prices. Keywords  Arbitrage Pricing, Convex Transaction Costs, Viability JEL Classification  G12, D52, C62