The concept of arbitrage has acquired a precise, technical meaning in quantitative finance (see Arbitrage Pricing Theory; Arbitrage Strategy; Arbitrage Bounds). In theoretical pricing of derivative securities, an arbitrage is a riskless trading strategy that generates a positive profit with no net investment of funds. This definition can be loosened to allow the positive profit to be nonnegativ...

(a) Give the definition of an arbitrage opportunity. [1] (b) Show that the existence of Q implies non-existence of arbitrage opportunities. [2] (c) Explain why if there are no arbitrage opportunities in the multi-period model, then there will be no arbitrage opportunities in any underlying single period. Use this result to show that non-existence of arbitrage opportunities implies existence of ...

We generalize the Arbitrage Pricing Theory (APT) to include the contribution of virtual arbitrage opportunities. We model the arbitrage return by a stochastic process. The latter is incorporated in the APT framework to calculate the correction to the APT due to the virtual arbitrage opportunities. The resulting relations reduce to the APT for an infinitely fast market reaction or in the case wh...

In a model independent discrete time financial market, we discuss the richness of the family of martingale measures in relation to different notions of Arbitrage, generated by a class S of significant sets, which we call Arbitrage de la classe S. The choice of S reflects into the intrinsic properties of the class of polar sets of martingale measures. In particular: for S = {Ω}, absence of Model...

Consumer arbitrage affects international pricing in several ways. If all consumers face the same arbitrage costs, a monopolist's profit increases with arbitrage costs, and world welfare declines with them (if output does not rise). If arbitrage costs differ across consumers, a monopolist may sell in a second country even if there is no local demand—it can use the second country to discriminate ...

The arbitrage-free range of values of the loss leg of an nth-to-default swap, and the arbitrage-free range of premium payments for such a swap, are derived for homogeneous baskets of arbitrary numbers of reference entities. Elementary arbitrage arguments are given which show that arbitrage opportunities exist if the prices lie outside of the bounds, and analyses of both a discrete-time model an...

This paper shows that arbitrage is limited if rational agents face uncertainty about completing their arbitrage portfolios. This “execution risk” arises in our model because there are slippages in asset prices as arbitrageurs compete for the limited supply of assets needed for a profitable arbitrage portfolio. This is distinct from the existing limits of arbitrage such as noise trader risk, fun...

Transit fare arbitrage is the scenario when two or more commuters agree to swap tickets during travel in such a way that total cost is lower than otherwise. Such arbitrage allows pricing inefficiencies to be explored and exploited, leading to improved pricing models. In this paper we discuss the basics of fare arbitrage through an intuitive pricing framework involving population density. We the...

This paper studies asset pricing in arbitrage-free financial markets in general state space (both for frictionless market and for market with transaction cost). The mathematical formulation is based on a locally convex topological space for weakly arbitrage-free securities’ structure and a separable Banach space for strictly arbitragefree securities’ structure. We establish, for these two types...

The objective in this paper is to develop and implement FGP-2 (Financial Genetic Programming) on intra daily tick data for stock index options and futures arbitrage in a manner that is suitable for online trading when windows of profitable arbitrage opportunities exist for short periods from one to ten minutes. Our benchmark for FGP-2 is the textbook rule for detecting arbitrage profits. This r...