Simple arbitrage

DOI10.1214/11-AAP830zbMATH Open1266.91092arXiv1210.5391MaRDI QIDQ691114FDOQ691114

Christian Bender

Publication date: 29 November 2012

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We characterize absence of arbitrage with simple trading strategies in a discounted market with a constant bond and several risky assets. We show that if there is a simple arbitrage, then there is a 0-admissible one or an obvious one, that is, a simple arbitrage which promises a minimal riskless gain of epsilon, if the investor trades at all. For continuous stock models, we provide an equivalent condition for absence of 0-admissible simple arbitrage in terms of a property of the fine structure of the paths, which we call "two-way crossing." This property can be verified for many models by the law of the iterated logarithm. As an application we show that the mixed fractional Black-Scholes model, with Hurst parameter bigger than a half, is free of simple arbitrage on a compact time horizon. More generally, we discuss the absence of simple arbitrage for stochastic volatility models and local volatility models which are perturbed by an independent 1/2-H"{o}lder continuous process.

Full work available at URL: https://arxiv.org/abs/1210.5391

zbMATH Keywords

fractional Brownian motionconditional full supportobvious arbitragesimple strategies

Mathematics Subject Classification ID

Fractional processes, including fractional Brownian motion (60G22) Portfolio theory (91G10) Martingales with continuous parameter (60G44)

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Cited In (13)

• Utility maximization problem with transaction costs: optimal dual processes and stability
• Market Models with Optimal Arbitrage
• How Rough Path Lifts Affect Expected Return and Volatility: A Rough Model under Transaction Cost
• Volatility measurement with pockets of extreme return persistence
• A càdlàg rough path foundation for robust finance
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• No arbitrage and lead-lag relationships
• No arbitrage conditions for simple trading strategies
• Title not available (Why is that?)
• Short Communication: A Note on Utility Maximization with Proportional Transaction Costs and Stability of Optimal Portfolios
• PREDICTION OF STOCK RETURNS MAY BE FALLACIOUS: A STOCHASTIC CONFIRMATION OF MALKIEL’S ASSERTION ON DARTBOARD INVESTMENTS
• Remarks on simple arbitrage on markets with bid and ask prices
• Shadow prices, fractional Brownian motion, and portfolio optimisation under transaction costs

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