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Mean-Reverting Market Model: Speculative Opportunities and Non-Arbitrage

  • Nikolai Dokuchaev

The paper studies arbitrage opportunities and possible speculative opportunities for diffusion mean-reverting market models. It is shown that the Novikov condition is satisfied for any time interval and for any set of parameters. It is non-trivial because the appreciation rate has Gaussian distribution converging to a stationary limit. It follows that the mean-reverting model is arbitrage-free for any finite time interval. Further, it is shown that this model still allows some speculative opportunities: a gain for a wide enough set of expected utilities can be achieved for a strategy that does not require any hypothesis on market parameters and does not use estimation of these parameters.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13504860701255078
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Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 14 (2007)
Issue (Month): 4 ()
Pages: 319-337

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Handle: RePEc:taf:apmtfi:v:14:y:2007:i:4:p:319-337
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