This note connects the idea of arbitrage pricing under transaction costs to the existence and structure of derivatives markets. It illustrates the “paradox” of pure arbitrage pricing via replicating portfolios and the existence of markets for redundant securities in a general multi-period model as in Duffie (1996). A general result under homogeneous transaction costs regarding the choice betwee...

We describe a challenging class of large mixed-integer second-order cone programming models which arise in computing the maximum price that a buyer is willing to disburse to acquire an American contingent claim in an incomplete financial market with no arbitrage opportunity. Taking the viewpoint of an investor who is willing to allow a controlled amount of risk by replacing the classical no-arb...

We consider a multiperiod financial exchange economy with nominal assets and restricted participation, where each agent’s portfolio choice is restricted to a closed, convex set containing zero, as in Siconolfi (1989). Using an approach that dates back to Cass (1984, 2006) in the unconstrained case, we seek to isolate arbitrage-free asset prices that are also quasi-equilibrium or equilibrium ass...

The paper reports an experiment on the pricing of financial options. Arbitrage-free option pricing is tested against three hypotheses based on mental accounting. The data show that, even with considerable experience, unexploited arbitrage opportunities persist. Subjects do not seem to make the connections between the different investment possibilities, as essential for arbitrage-free pricing (A...

Recent advances in high-frequency financial trading have made light propagation delays between geographically separated exchanges relevant. Here we show that there exist optimal locations from which to coordinate the statistical arbitrage of pairs of spacelike separated securities, and calculate a representative map of such locations on Earth. Furthermore, trading local securities along chains ...

We con...rm the presence of substantial non-linearities in real exchange rate dynamics at the sectoral level. There exists zones where arbitrage is not pro...table because of transaction costs, and thus mean reversion is inexistent. We compute the speed of mean reversion of sector speci...c real exchange rates, conditional on the existence of arbitrage as implied by our non-linear estimations, ...

This paper employs genetic programming to discover statistical arbitrage strategies on the banking sector in the Euro Stoxx universe. Binary decision rules are evolved using two different representations. The first is the classical single tree approach, while the second is a dual tree structure where evaluation is contingent on the current market position. Hence, buy and sell rules are co-evolv...

We describe a framework in which to generalize the Heath, Jarrow and Morton model for the term structure of interest rates. We represent the model in terms of the triplet of characteristics of the underlying semimartingales. We state and prove the necessary and sufficient conditions for absence of arbitrage in terms of the characteristics of the price process. The methodology is then extended t...

in searching a market-neutral arbitrage strategy in forex market, we took a portfolio of three major currency pairs, eur-usd, usd-jpy, and eur-jpy. there are eight approaches, different cases of short and long positions; for example buying 1st and selling two others, etc. historical daily fx rates were gathered since january 1990 until february 2011. monthly covariances between daily growth rat...