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-BJPS203zbMATH Open1312.91096arXiv1206.5756OpenAlexW3126142077MaRDI QIDQ398201FDOQ398201

Nils Chr. Framstad

Publication date: 12 August 2014

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

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.

Full work available at URL: https://arxiv.org/abs/1206.5756

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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)

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Cited In (1)

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