Trajectory-based models, arbitrage and continuity

DOI10.1142/S0219024916500151MaRDI QIDQ2806359zbMATH OpenOpenAlexFDO

Authors Alexander Alvarez, Sebastian E. Ferrando

Publication date 17 May 2016

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1403.5685

zbMATH Keywords

free lunch with vanishing risklocal continuitynonsemimartingale processestrajectory-based models and stopping times

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40) Applications of stochastic analysis (to PDEs, etc.) (60H30) Portfolio theory (91G10)

Abstract: The paper develops no arbitrage results for trajectory based models by imposing general constraints on the trading portfolios. The main condition imposed, in order to avoid arbitrage opportunities, is a local continuity requirement on the final portfolio value considered as a functional on the trajectory space. The paper shows this to be a natural requirement by proving that a large class of practical trading strategies, defined by means of trajectory based stopping times, give rise to locally continuous functionals. The theory is illustrated, with some detail, for two specific trajectory models of practical interest. The implications for stochastic models which are not semimartingales are described. The present paper extends some of the results in [1] by incorporating in the formalism a larger set of trading portfolios.

Review text

Instead of starting with a probability space \((\Omega, {\mathcal F}, ({\mathcal F}_{t\geq 0}, P))\) and modelling the stock as a stochastic process \(X\), the authors propose to concentrate on a trajectory space \({\mathcal J}\in {\mathcal D}[0,T]\), where the latter is the set of functions \(x:[0,T]\to \mathbb R\) which are right continuous with left limits.NEWLINENEWLINEThe proposed approach focuses on the set \({\mathcal J}\) (not on a probability \(P\) to model the market -- the classical paradigm), which is conveniently treated as a metric space \(({\mathcal J},d)\). Within this general view, the paper deals only with arbitrage notions. One of the main results states that general trajectory-based models have no free lunch with vanishing risk.

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Cites work

• A model-free version of the fundamental theorem of asset pricing and the super-replication theorem
• Change of variable formulas for non-anticipative functionals on path space
• Financial Modelling with Jump Processes
• Fractional processes as models in stochastic finance
• scientific article; zbMATH DE number 3274494 (Why is no real title available?)
• Stochastic integrals and conditional full support

Cited in

(7)

• Dynamic spanning without probabilities
• Arbitrage and hedging in a non probabilistic framework
• Trajectory based market models: evaluation of minmax price bounds
• Trajectory based market models, evaluation of minmax price bounds
• Financial modelling with multivariate mixed fractional Brownian motion
• Trajectorial market models: arbitrage and pricing intervals
• On statistical indistinguishability of complete and incomplete discrete time market models

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