Diversity and arbitrage in a regulatory breakup model
AbstractIn 1999 Robert Fernholz observed an inconsistency between the normative assumption of existence of an equivalent martingale measure (EMM) and the empirical reality of diversity in equity markets. We explore a method of imposing diversity on market models by a type of antitrust regulation that is compatible with EMMs. The regulatory procedure breaks up companies that become too large, while holding the total number of companies constant by imposing a simultaneous merge of other companies. The regulatory events are assumed to have no impact on portfolio values. As an example, regulation is imposed on a market model in which diversity is maintained via a log-pole in the drift of the largest company. The result is the removal of arbitrage opportunities from this market while maintaining the market's diversity.
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Bibliographic InfoArticle provided by Springer in its journal Annals of Finance.
Volume (Year): 7 (2011)
Issue (Month): 3 (August)
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Web page: http://www.springerlink.com/link.asp?id=112370
Diversity; Arbitrage; Relative arbitrage; Equivalent martingale measure; Antitrust; Regulation; G11;
Other versions of this item:
- Winslow Strong & Jean-Pierre Fouque, 2010. "Diversity and Arbitrage in a Regulatory Breakup Model," Papers 1003.5650, arXiv.org, revised Dec 2010.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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- Adrian Banner & Daniel Fernholz, 2008. "Short-term relative arbitrage in volatility-stabilized markets," Annals of Finance, Springer, vol. 4(4), pages 445-454, October.
- Fernholz, Robert, 1999. "On the diversity of equity markets," Journal of Mathematical Economics, Elsevier, vol. 31(3), pages 393-417, April.
- Jörg Osterrieder & Thorsten Rheinländer, 2006. "Arbitrage Opportunities in Diverse Markets via a Non-equivalent Measure Change," Annals of Finance, Springer, vol. 2(3), pages 287-301, July.
- Robert Fernholz & Ioannis Karatzas & Constantinos Kardaras, 2005. "Diversity and relative arbitrage in equity markets," Finance and Stochastics, Springer, vol. 9(1), pages 1-27, January.
- Winslow Strong, 2012. "Generalizations of Functionally Generated Portfolios with Applications to Statistical Arbitrage," Papers 1212.1877, arXiv.org, revised Oct 2013.
- Winslow Strong, 2011. "Fundamental theorems of asset pricing for piecewise semimartingales of stochastic dimension," Papers 1112.5340, arXiv.org.
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