English

Volatility and Arbitrage

Portfolio Management 2016-08-23 v1 Probability Mathematical Finance

Abstract

The capitalization-weighted total relative variation i=1d0μi(t)dlogμi(t)\sum_{i=1}^d \int_0^\cdot \mu_i (t) \mathrm{d} \langle \log \mu_i \rangle (t) in an equity market consisting of a fixed number dd of assets with capitalization weights μi()\mu_i (\cdot) is an observable and nondecreasing function of time. If this observable of the market is not just nondecreasing, but actually grows at a rate which is bounded away from zero, then strong arbitrage can be constructed relative to the market over sufficiently long time horizons. It has been an open issue for more than ten years, whether such strong outperformance of the market is possible also over arbitrary time horizons under the stated condition. We show that this is not possible in general, thus settling this long-open question. We also show that, under appropriate additional conditions, outperformance over any time horizon indeed becomes possible, and exhibit investment strategies that effect it.

Keywords

Cite

@article{arxiv.1608.06121,
  title  = {Volatility and Arbitrage},
  author = {E. Robert Fernholz and Ioannis Karatzas and Johannes Ruf},
  journal= {arXiv preprint arXiv:1608.06121},
  year   = {2016}
}
R2 v1 2026-06-22T15:26:10.541Z