Asymptotic exponential arbitrage and utility-based asymptotic arbitrage in Markovian models of financial markets

Large deviations (60F10) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of Markov chains and discrete-time Markov processes on general state spaces (social mobility, learning theory, industrial processes, etc.) (60J20) Financial applications of other theories (91G80)

Abstract: Consider a discrete-time infinite horizon financial market model in which the logarithm of the stock price is a time discretization of a stochastic differential equation. Under conditions different from those given in a previous paper of ours, we prove the existence of investment opportunities producing an exponentially growing profit with probability tending to

1

geometrically fast. This is achieved using ergodic results on Markov chains and tools of large deviations theory. Furthermore, we discuss asymptotic arbitrage in the expected utility sense and its relationship to the first part of the paper.

Review text

The authors consider a discrete-time infinite horizon financial market model in which the logarithm of the stock price \(X_t\) is a time discretization of a stochastic differential equation: \[ X_t-X_{t-1}=\mu(X_{t-1})+\sigma (X_{t-1})\epsilon_t. \] Using ergodic results on Markov chains and tools of large deviations theory, the authors prove the existence of investment opportunities producing an exponentially growing profit with probability tending to \(1\) geometrically fast. Furthermore, they discuss asymptotic arbitrage in the expected utility sense and its relationship to the model considered.

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