Related papers: Arbitrage in markets with bid-ask spreads
The purpose of Inventory Pricing is to bid the right prices to online ad opportunities, which is crucial for a Demand-Side Platform (DSP) to win advertising auctions in Real-Time Bidding (RTB). In the planning stage, advertisers need the…
We study the arbitrage opportunities in the presence of transaction costs in a sequence of binary markets approximating the fractional Black-Scholes model. This approximating sequence was constructed by Sottinen and named fractional binary…
Risk-neutral pricing dictates that the discounted derivative price is a martingale in a measure equivalent to the economic measure. The residual ambiguity for incomplete markets is here resolved by minimising the entropy of the price…
Mandatory emission trading schemes are being established around the world. Participants of such market schemes are always exposed to risks. This leads to the creation of an accompanying market for emission-linked derivatives. To evaluate…
This paper studies an asset pricing model in a partially observable market with a large number of heterogeneous agents using the mean field game theory. In this model, we assume that investors can only observe stock prices and must infer…
Modelling joint dynamics of liquid vanilla options is crucial for arbitrage-free pricing of illiquid derivatives and managing risks of option trade books. This paper develops a nonparametric model for the European options book respecting…
Markets composed of stocks with capitalization processes represented by positive continuous semimartingales are studied under the condition that the market excess growth rate is bounded away from zero. The following examples of these…
We have embedded the classical theory of stochastic finance into a differential geometric framework called Geometric Arbitrage Theory and show that it is possible to: --Write arbitrage as curvature of a principal fibre bundle.…
No-arbitrage asset pricing characterizes valuation through the existence of equivalent martingale measures relative to a filtration and a class of admissible trading strategies. In practice, pricing is performed across multiple asset…
In this article, we show necessary and sufficient conditions for a function to transform a continuous Markov semimartingale to a semimartingale. As a result, the no-arbitrage principle guarantees the differentiability of asset prices with…
This study proposes a versatile model for the dynamics of the best bid and ask prices using an extended Hawkes process. The model incorporates the zero intensities of the spread-narrowing processes at the minimum bid-ask spread,…
A concept of martingale-fair index of return, consistent with Arbitrage Free Pricing Theory, is introduced. An explicit formula for the average rate of return of a group of investment/pension funds in a discrete time stochastic model is…
In a model with no given probability measure, we consider asset pricing in the presence of frictions and other imperfections and characterize the property of coherent pricing, a notion related to (but much weaker than) the no arbitrage…
Consider a discrete-time infinite horizon financial market model in which the logarithm of the stock price is a time discretization of a stochastic differential equation. Under conditions different from those given in a previous paper of…
We consider non-concave and non-smooth random utility functions with do- main of definition equal to the non-negative half-line. We use a dynamic pro- gramming framework together with measurable selection arguments to establish both the…
This paper presents a new model for options pricing. The Black-Scholes-Merton (BSM) model plays an important role in financial options pricing. However, the BSM model assumes that the risk-free interest rate, volatility, and equity premium…
We study a risk-sharing economy where an arbitrary number of heterogenous agents trades an arbitrary number of risky assets subject to quadratic transaction costs. For linear state dynamics, the forward-backward stochastic differential…
Non-equilibrium phenomena occur not only in physical world, but also in finance. In this work, stochastic relaxational dynamics (together with path integrals) is applied to option pricing theory. A recently proposed model (by Ilinski et…
Martingale Optimal Transport (MOT) provides a framework for robust pricing and hedging of illiquid derivatives. Classical MOT enforces exact calibration of model marginals to the mid-prices of vanilla options. Motivated by the industry…
The purpose of this work is to explore the role that random arbitrage opportunities play in pricing financial derivatives. We use a non-equilibrium model to set up a stochastic portfolio, and for the random arbitrage return, we choose a…