Asymptotic proportion of arbitrage points in fractional binary markets

DOI10.1016/J.SPA.2015.09.002MaRDI QIDQ901293zbMATH OpenOpenAlexFDO

Authors Fernando Cordero, Irene Klein, Lavinia Perez-Ostafe

Publication date 23 December 2015

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

Copyright license Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

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

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)

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 $1$.

Recommendations

• Strong asymptotic arbitrage in the large fractional binary market
• Critical transaction costs and 1-step asymptotic arbitrage in fractional binary markets
• Binary market models with memory
• Arbitrage in a Discrete Version of the Wick-Fractional Black-Scholes Market
• Asymptotic arbitrage in fractional mixed markets

Cites work

• scientific article; zbMATH DE number 1713116 (Why is no real title available?)
• scientific article; zbMATH DE number 3143963 (Why is no real title available?)
• scientific article; zbMATH DE number 1243444 (Why is no real title available?)
• scientific article; zbMATH DE number 1406736 (Why is no real title available?)
• A uniqueness theorem of Beurling for Fourier transform pairs
• An elementary approach to a Girsanov formula and other analytical results on fractional Brownian motions
• Binary markets under transaction costs
• Donsker Type Theorem for the Rosenblatt Process and a Binary Market Model
• Fractional Brownian Motions, Fractional Noises and Applications
• Fractional Brownian motion, random walks and binary market models
• Local Times and Sample Function Properties of Stationary Gaussian Processes
• Long range dependence in financial markets
• Option pricing: A simplified approach
• Probability with Martingales
• Stock market prices and long-range dependence
• The pricing of options and corporate liabilities

Cited in

(2)

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

This page was built for publication: Asymptotic proportion of arbitrage points in fractional binary markets

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q901293)