Market Models with Optimal Arbitrage
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Abstract: We construct and study market models admitting optimal arbitrage. We say that a model admits optimal arbitrage if it is possible, in a zero-interest rate setting, starting with an initial wealth of 1 and using only positive portfolios, to superreplicate a constant c>1. The optimal arbitrage strategy is the strategy for which this constant has the highest possible value. Our definition of optimal arbitrage is similar to the one in Fernholz and Karatzas (2010), where optimal relative arbitrage with respect to the market portfolio is studied. In this work we present a systematic method to construct market models where the optimal arbitrage strategy exists and is known explicitly. We then develop several new examples of market models with arbitrage, which are based on economic agents' views concerning the impossibility of certain events rather than ad hoc constructions. We also explore the concept of fragility of arbitrage introduced in Guasoni and Rasonyi (2012), and provide new examples of arbitrage models which are not fragile in this sense.
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- scientific article; zbMATH DE number 1129914
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(12)- The strong predictable representation property in initially enlarged filtrations under the density hypothesis
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