Detection of arbitrage opportunities in multi-asset derivatives markets

DOI10.1515/DEMO-2021-0121MaRDI QIDQ2667758zbMATH OpenOpenAlexFDO

Authors Antonis Papapantoleon, Paulo Yanez Sarmiento

Publication date 1 March 2022

Published in Dependence Modeling (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/2002.06227

zbMATH Keywords

arbitragecopulasdetection of arbitrage opportunitiesequivalent martingale measuresimproved Fréchet-Hoeffding boundsmulti-asset derivativesmultiple assets

Mathematics Subject Classification ID

Characterization and structure theory for multivariate probability distributions; copulas (62H05) Applications of statistics to actuarial sciences and financial mathematics (62P05) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We are interested in the existence of equivalent martingale measures and the detection of arbitrage opportunities in markets where several multi-asset derivatives are traded simultaneously. More specifically, we consider a financial market with multiple traded assets whose marginal risk-neutral distributions are known, and assume that several derivatives written on these assets are traded simultaneously. In this setting, there is a bijection between the existence of an equivalent martingale measure and the existence of a copula that couples these marginals. Using this bijection and recent results on improved Fr'echet-Hoeffding bounds in the presence of additional information on functionals of a copula by Lux and Papapantoleon [18], we can extend the results of Tavin [33] on the detection of arbitrage opportunities to the general multi-dimensional case. More specifically, we derive sufficient conditions for the absence of arbitrage and formulate an optimization problem for the detection of a possible arbitrage opportunity. This problem can be solved efficiently using numerical optimization routines. The most interesting practical outcome is the following: we can construct a financial market where each multi-asset derivative is traded within its own no-arbitrage interval, and yet when considered together an arbitrage opportunity may arise.

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Cited in

(4)

• Arbitrage opportunities on derivatives: a linear programming approach
• scientific article; zbMATH DE number 1304898 (Why is no real title available?)
• Improved robust price bounds for multi-asset derivatives under market-implied dependence information
• Neural networks can detect model-free static arbitrage strategies

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