Arbitrage problems with reflected geometric Brownian motion

DOI10.1007/S00780-023-00525-XMaRDI QIDQ6181515zbMATH OpenOpenAlexFDO

Authors Dean Buckner, Kevin Dowd, Hardy Hulley

Publication date 2 January 2024

Published in Finance and Stochastics (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/2201.05312

zbMATH Keywords

arbitragecontingent claim valuationlocal timereflected geometric Brownian motion

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Financial markets (91G15)

Abstract: Contrary to the claims made by several authors, a financial market model in which the price of a risky security follows a reflected geometric Brownian motion is not arbitrage-free. In fact, such models violate even the weakest no-arbitrage condition considered in the literature. Consequently, they do not admit num'eraire portfolios or equivalent risk-neutral probability measures, which makes them totally unsuitable for contingent claim valuation. Unsurprisingly, the published option pricing formulae for such models violate textbook no-arbitrage bounds.

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Cited in

(4)

• The moment generating function of a reflected Brownian motion with drift
• Pricing and hedging for a sticky diffusion
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