Asymptotic proportion of arbitrage points in fractional binary markets

DOI10.1016/J.SPA.2015.09.002zbMATH Open1407.91244arXiv1401.7850OpenAlexW1627259274MaRDI QIDQ901293FDOQ901293

Irene Klein, Fernando Cordero, Lavinia Perez-Ostafe

Publication date: 23 December 2015

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: A fractional binary market is an approximating sequence of binary models for the fractional Black-Scholes model, which Sottinen constructed by giving an analogue of the Donsker's theorem. In a binary market the arbitrage condition can be expressed as a condition on the nodes of a binary tree. We call "arbitrage points" the points in the binary tree which verify such an arbitrage condition and "arbitrage paths" the paths in the binary tree which cross at least one arbitrage point. Using this terminology, a binary market admits arbitrage if and only if there is at least one arbitrage point in the binary tree or equivalently if there is at least one arbitrage path. Following the lines of Sottinen, who showed that the arbitrage persists in the fractional binary market, we further prove that starting from any point in the tree, we can reach an arbitrage point. This implies that, in the limit, there is an infinite number of arbitrage points. Next, we provide an in-depth analysis of the asymptotic proportion of arbitrage points at asymptotic levels and of arbitrage paths in the fractional binary market. All these results are obtained by studying a rescaled disturbed random walk. We moreover show that, when $H$ is close to $1$, with probability $1$ a path in the binary tree crosses an infinite number of arbitrage points. In particular, for such $H$, the asymptotic proportion of arbitrage paths is equal to $1$.

Full work available at URL: https://arxiv.org/abs/1401.7850

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zbMATH Keywords

fractional Brownian motionfractional binary marketsarbitrage opportunitiesbinary markets

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Fractional processes, including fractional Brownian motion (60G22) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (2)

• Strong asymptotic arbitrage in the large fractional binary market
• Binary market models with memory

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