On free lunches in random walk markets with short-sale constraints and small transaction costs, and weak convergence to Gaussian continuous-time processes

DOI10.1214/12-BJPS203MaRDI QIDQ398201zbMATH OpenOpenAlexFDO

Authors Nils Chr. Framstad

Publication date 12 August 2014

Published in Brazilian Journal of Probability and Statistics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1206.5756, https://projecteuclid.org/euclid.bjps/1396615438

zbMATH Keywords

random walkGaussian processesweak convergencestock price model

Mathematics Subject Classification ID

Gaussian processes (60G15) Fractional processes, including fractional Brownian motion (60G22) Sums of independent random variables; random walks (60G50) Generalizations of martingales (60G48) Microeconomic theory (price theory and economic markets) (91B24) Financial applications of other theories (91G80)

Abstract: This paper considers a sequence of discrete-time random walk markets with a safe and a single risky investment opportunity, and gives conditions for the existence of arbitrages or free lunches with vanishing risk, of the form of waiting to buy and selling the next period, with no shorting, and furthermore for weak convergence of the random walk to a Gaussian continuous-time stochastic process. The conditions are given in terms of the kernel representation with respect to ordinary Brownian motion and the discretisation chosen. Arbitrage and free lunch with vanishing risk examples are established where the continuous-time analogue is arbitrage-free under small transaction costs - including for the semimartingale modifications of fractional Brownian motion suggested in the seminal Rogers (1997) article proving arbitrage in fBm models.

Recommendations

• No arbitrage without semimartingales
• Free lunch large financial markets with continuous price processes
• Asymptotic arbitrage with small transaction costs
• Fractional Brownian motion, random walks and binary market models
• No free lunch under transaction costs for continuous processes

Cites work

• scientific article; zbMATH DE number 5120855 (Why is no real title available?)
• scientific article; zbMATH DE number 1227086 (Why is no real title available?)
• Arbitrage with Fractional Brownian Motion
• Consistent price systems and face-lifting pricing under transaction costs
• Fractional Brownian motion, random walks and binary market models
• Gaussian moving averages, semimartingales and option pricing.
• Mixed fractional Brownian motion
• NO ARBITRAGE UNDER TRANSACTION COSTS, WITH FRACTIONAL BROWNIAN MOTION AND BEYOND
• Proofs of the martingale FCLT

Cited in

(1)

• scientific article; zbMATH DE number 1855611 (Why is no real title available?)

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