Strong asymptotic arbitrage in the large fractional binary market

DOI10.1007/S11579-015-0155-3zbMATH Open1334.60054arXiv1501.07445OpenAlexW3101768219WikidataQ59470366 ScholiaQ59470366MaRDI QIDQ253102FDOQ253102

Lavinia Perez-Ostafe, Fernando Cordero

Publication date: 8 March 2016

Published in: Mathematics and Financial Economics (Search for Journal in Brave)

Abstract: We study, from the perspective of large financial markets, the asymptotic arbitrage opportunities in a sequence of binary markets approximating the fractional Black-Scholes model. This approximating sequence was introduced by Sottinen and named fractional binary market. The large financial market under consideration does not satisfy the standard assumptions of the theory of asymptotic arbitrage. For this reason, we follow a constructive approach to show first that a strong type of asymptotic arbitrage exists in the large market without transaction costs. Indeed, with the help of an appropriate version of the law of large numbers and a stopping time procedure, we construct a sequence of self-financing strategies, which leads to the desired result. Next, we introduce, in each small market, proportional transaction costs, and we construct, following a similar argument, a sequence of self-financing strategies providing a strong asymptotic arbitrage when the transaction costs converge fast enough to 0.

Full work available at URL: https://arxiv.org/abs/1501.07445

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zbMATH Keywords

fractional Brownian motionstopping timeasymptotic arbitragefractional binary marketslaw of large numberstransaction costs

Mathematics Subject Classification ID

Fractional processes, including fractional Brownian motion (60G22) Auctions, bargaining, bidding and selling, and other market models (91B26) Sums of independent random variables; random walks (60G50) Strong limit theorems (60F15) Stopping times; optimal stopping problems; gambling theory (60G40) Microeconomic theory (price theory and economic markets) (91B24) Financial applications of other theories (91G80)

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Cited In (3)

• Binary market models with memory
• ASYMPTOTIC ARBITRAGE IN THE HESTON MODEL
• Asymptotic arbitrage in fractional mixed markets

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