Trajectory-based models, arbitrage and continuity

DOI10.1142/S0219024916500151zbMATH Open1348.91246arXiv1403.5685OpenAlexW2134389094MaRDI QIDQ2806359FDOQ2806359

Authors: Alexander Alvarez, Sebastian E. Ferrando 

Publication date: 17 May 2016

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: The paper develops no arbitrage results for trajectory based models by imposing general constraints on the trading portfolios. The main condition imposed, in order to avoid arbitrage opportunities, is a local continuity requirement on the final portfolio value considered as a functional on the trajectory space. The paper shows this to be a natural requirement by proving that a large class of practical trading strategies, defined by means of trajectory based stopping times, give rise to locally continuous functionals. The theory is illustrated, with some detail, for two specific trajectory models of practical interest. The implications for stochastic models which are not semimartingales are described. The present paper extends some of the results in [1] by incorporating in the formalism a larger set of trading portfolios.

Full work available at URL: https://arxiv.org/abs/1403.5685

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zbMATH Keywords

free lunch with vanishing risklocal continuitynonsemimartingale processestrajectory-based models and stopping times

Mathematics Subject Classification ID

Portfolio theory (91G10) Stopping times; optimal stopping problems; gambling theory (60G40) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Cites Work

• Financial Modelling with Jump Processes
• Title not available (Why is that?)
• Fractional processes as models in stochastic finance
• Change of variable formulas for non-anticipative functionals on path space
• A model-free version of the fundamental theorem of asset pricing and the super-replication theorem
• Stochastic integrals and conditional full support

Cited In (5)

• Title not available (Why is that?)
• Title not available (Why is that?)
• Dynamic spanning without probabilities
• On statistical indistinguishability of complete and incomplete discrete time market models
• Arbitrage and hedging in a non probabilistic framework

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