Arbitrage without borrowing or short selling?
File(s)
Accepted version
Published version
Author(s)
Lukkarinen, J
Pakkanen, MS
Type
Journal Article
Abstract
We show that a trader, who starts with no initial wealth and is not allowed
to borrow money or short sell assets, is theoretically able to attain positive
wealth by continuous trading, provided that she has perfect foresight of future asset prices, given by a continuous semimartingale. Such an arbitrage strategy can be constructed as a process of finite variation that satisfies a seemingly innocuous self-financing condition, formulated using a pathwise
Riemann-Stieltjes integral. Our result exemplifies the potential intricacies of
formulating economically meaningful self-financing conditions in continuous
time, when one leaves the conventional arbitrage-free framework.
to borrow money or short sell assets, is theoretically able to attain positive
wealth by continuous trading, provided that she has perfect foresight of future asset prices, given by a continuous semimartingale. Such an arbitrage strategy can be constructed as a process of finite variation that satisfies a seemingly innocuous self-financing condition, formulated using a pathwise
Riemann-Stieltjes integral. Our result exemplifies the potential intricacies of
formulating economically meaningful self-financing conditions in continuous
time, when one leaves the conventional arbitrage-free framework.
Date Issued
2016-09-27
Date Acceptance
2016-09-15
Citation
Mathematics and Financial Economics, 2016, 11 (3), pp.263-274
ISSN
1862-9679
Publisher
Springer Verlag (Germany)
Start Page
263
End Page
274
Journal / Book Title
Mathematics and Financial Economics
Volume
11
Issue
3
Copyright Statement
© The Author(s) 2016. This article is published with open access at Springerlink.com
License URL
Sponsor
Academy of Finland
Grant Number
258042
Subjects
q-fin.MF
q-fin.MF
math.PR
60H05, 90G10, 60G44
Notes
13 pages, 1 figure
Publication Status
Published