No-arbitrage conditions in discrete financial models (Q4493336)

Let a positive predictable sequence \(B=(B_{n})_{0\leq n\leq N}\) describe the dynamics of the bank account and a \(d\)-dimensional positive stochastic sequence \(S=(S^1_{n},\ldots,S^{d}_{n})_{0\leq n\leq N}\) describe the evolution of the price of a risky asset on the discrete stochastic base \((\Omega,F,(F_{n})_{0\leq n\leq N},P)\). Any portfolio based on these assets can be described by a predictable sequence \(\pi=(\beta_{n},\gamma_{n}^1,\ldots,\gamma_{n}^{d})_{0\leq n\leq N}\) and let \(SF\) be a class of self-financing portfolios. The portfolio-value of \(\pi\) is the sequence \[ X^{\pi}=(X_{n}^{\pi})_{0\leq n\leq N}, \quad X_{n}^{\pi}=\beta_{n}B_{n}+\sum_{i=1}^{d}\gamma_{n}^{i}S_{n}^{i}. \] The author considers following arbitrage conditions: 1) The portfolio \(\pi\) realises arbitrage of the first kind if \(\pi\in SF\); \(X_0^{\pi}=0\); \(X_{N}^{\pi}\geq 0\) (P-a.e.) and \(P(X_{N}^{\pi}>0)>0\); 2) The portfolio \(\pi\) realises arbitrage of the second kind if \(\pi\in SF\); \(X_0^{\pi}<0\); \(X_{N}^{\pi}\geq 0\) (P-a.e.); 3) The portfolio \(\pi\) realises arbitrage of the third kind if \(\beta_{n}(D_{n-1}B_{n}-B_{n-1})+\gamma_{n}(D_{n-1}S_{n}-S_{n-1})\geq 0\) (P-a.e.), \(n=1,\ldots,N\), and not all the left-hand sides are equal to 0 (P-a.e.), where discount coefficients \(D_{n}>0\) and \(D_{n}\) is \(F_{n}\)-measurable; 4) The portfolio \(\pi\) realises arbitrage of the fourth kind if \(-\beta_1B_0-\gamma_1S_0\geq 0\) (P-a.e.), \(-B_{n-1}\Delta\beta_{n}-S_{n-1}\Delta\gamma_{n}\geq 0\) (P-a.e.), \(n=2,\ldots,N\), \(\beta_{N}B_{N}+\gamma_{N}S_{N}\geq 0\) (P-a.e.) and not all the left sides are equal to 0 (P-a.e.). The interrelationships between these concepts are described.