Related papers: Viability and Arbitrage under Knightian Uncertaint…
We give characterizations of asymptotic arbitrage of the first and second kind and of strong asymptotic arbitrage for large financial markets with small proportional transaction costs $\la_n$ on market $n$ in terms of contiguity properties…
The classical discrete time model of proportional transaction costs relies on the assumption that a feasible portfolio process has solvent increments at each step. We extend this setting in two directions, allowing for convex transaction…
We consider a general class of diffusion-based models and show that, even in the absence of an Equivalent Local Martingale Measure, the financial market may still be viable, in the sense that strong forms of arbitrage are excluded and…
In practice there are temporary arbitrage opportunities arising from the fact that prices for a given asset at different stock exchanges are not instantaneously the same. We will show that even in such an environment there exists a…
General equilibrium, the cornerstone of modern economics and finance, rests on assumptions many markets do not meet. Spectrum auctions, electricity markets, and cap-and-trade programs for resource rights often feature non-convexities in…
We develop two alternate approaches to arbitrage-free, market-complete, option pricing. The first approach requires no riskless asset. We develop the general framework for this approach and illustrate it with two specific examples. The…
An arbitrage strategy allows a financial agent to make certain profit out of nothing, i.e., out of zero initial investment. This has to be disallowed on economic basis if the market is in equilibrium state, as opportunities for riskless…
We derive integral tests for the existence and absence of arbitrage in a financial market with one risky asset which is either modeled as stochastic exponential of an Ito process or a positive diffusion with Markov switching. In particular,…
We construct an utility-based dynamic asset pricing model for a limit order market. The price is nonlinear in volume and subject to market impact. We solve an optimal hedging problem under the market impact and derive the dynamics of the…
We consider a dynamic market model of liquidity where unmatched buy and sell limit orders are stored in order books. The resulting net demand surface constitutes the sole input to the model. We prove that generically there is no arbitrage…
In discrete time markets with proportional transaction costs, Schachermayer (2004) shows that robust no-arbitrage is equivalent to the existence of a strictly consistent price system. In this paper, we introduce the concept of prospective…
This paper develops a theory of competitive equilibrium with indivisible goods based entirely on economic conditions on demand. The key idea is to analyze complementarity and substitutability between bundles of goods, rather than merely…
A range of empirical puzzles in finance has been explained as a consequence of traders being averse to ambiguity. Ambiguity averse traders can behave in financial portfolio problems in ways that cannot be rationalized as maximizing…
This article clarifies the relationship between pricing kernel monotonicity and the existence of opportunities for stochastic arbitrage in a complete and frictionless market of derivative securities written on a market portfolio. The…
We generalize Merton's asset valuation approach to systems of multiple financial firms where cross-ownership of equities and liabilities is present. The liabilities, which may include debts and derivatives, can be of differing seniority. We…
We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently…
We consider optimal consumption and portfolio choice in the presence of Knightian uncertainty in continuous-time. We embed the problem into the new framework of stochastic calculus for such settings, dealing in particular with the issue of…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
A standing assumption in the literature on proportional transaction costs is efficient friction. Together with robust no free lunch with vanishing risk, it rules out strategies of infinite variation, as they usually appear in frictionless…
A simple statement and accessible proof of a version of the Fundamental Theorem of Asset Pricing in discrete time is provided. Careful distinction is made between prices and cash flows in order to provide uniform treatment of all…