Diversity and arbitrage in a regulatory breakup model

DOI10.1007/S10436-010-0175-1MaRDI QIDQ635965zbMATH OpenOpenAlexFDO

Authors Winslow Strong, Jean-Pierre Fouque

Publication date 25 August 2011

Published in Annals of Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1003.5650

zbMATH Keywords

antitrustregulationequivalent martingale measurediversityarbitragerelative arbitrage

Mathematics Subject Classification ID

Generalizations of martingales (60G48) Microeconomic theory (price theory and economic markets) (91B24) Financial applications of other theories (91G80)

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.

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Cited in

(6)

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• Diverse market models of competing Brownian particles with splits and mergers
• Fundamental theorems of asset pricing for piecewise semimartingales of stochastic dimension
• Dynamic contagion in a banking system with births and defaults
• On a class of diverse market models
• Diversity-weighted portfolios with negative parameter

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