Diversity and arbitrage in a regulatory breakup model
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Publication:635965
DOI10.1007/S10436-010-0175-1zbMATH Open1219.91161arXiv1003.5650OpenAlexW3123415023MaRDI QIDQ635965FDOQ635965
Authors: Winslow Strong, Jean-Pierre Fouque 
Publication date: 25 August 2011
Published in: Annals of Finance (Search for Journal in Brave)
Abstract: In 1999 Robert Fernholz observed an inconsistency between the normative assumption of existence of an equivalent martingale measure (EMM) and the empirical reality of diversity in equity markets. We explore a method of imposing diversity on market models by a type of antitrust regulation that is compatible with EMMs. The regulatory procedure breaks up companies that become too large, while holding the total number of companies constant by imposing a simultaneous merge of other companies. The regulatory events are assumed to have no impact on portfolio values. As an example, regulation is imposed on a market model in which diversity is maintained via a log-pole in the drift of the largest company. The result is the removal of arbitrage opportunities from this market while maintaining the market's diversity.
Full work available at URL: https://arxiv.org/abs/1003.5650
Recommendations
Generalizations of martingales (60G48) Microeconomic theory (price theory and economic markets) (91B24) Financial applications of other theories (91G80)
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Cited In (6)
- Diversity and no arbitrage
- Diverse market models of competing Brownian particles with splits and mergers
- Fundamental theorems of asset pricing for piecewise semimartingales of stochastic dimension
- On a class of diverse market models
- Diversity-weighted portfolios with negative parameter
- Dynamic contagion in a banking system with births and defaults
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