Simple arbitrage (Q691114)

Absence of arbitrage in the sense of e.g.\ no free lunch with vanishing risk (NFLVR) implies that the asset price process is a semimartingale. This ceases to hold if trading is restricted to rebalancing only at finitely many stopping times. This paper studies so-called \textit{simple arbitrage} based on such simple trading strategies. As a main result simple arbitrages can be chosen to belong to one of two special cases. Either they need not enter a position of debt at all (\textit{0-admissible arbitrage}) or they lead to a deterministic minimal terminal gain if they start trading at all (\textit{obvious arbitrage}). For continous processes, the absence of 0-admissible arbitrage can be reformulated in terms of a so-called \textit{two-way crossing} property. In dimension one, the latter means that, at any time \(t\), the asset price on \([t,\infty)\) cannot have a local minimum/maximum in \(t\) unless it is locally constant.