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Real‐time detection of local no‐arbitrage violations

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  • Torben G. Andersen
  • Viktor Todorov
  • Bo Zhou

Abstract

This paper focuses on the task of detecting local episodes involving violation of the standard Itô semimartingale assumption for financial asset prices in real time that might induce arbitrage opportunities. Our proposed detectors, defined as stopping rules, are applied sequentially to continually incoming high‐frequency data. We show that they are asymptotically exponentially distributed in the absence of Itô semimartingale violations. On the other hand, when a violation occurs, we can achieve immediate detection under infill asymptotics. A Monte Carlo study demonstrates that the asymptotic results provide a good approximation to the finite‐sample behavior of the sequential detectors. An empirical application to S&P 500 index futures data corroborates the effectiveness of our detectors in swiftly identifying the emergence of an extreme return persistence episode in real time.

Suggested Citation

  • Torben G. Andersen & Viktor Todorov & Bo Zhou, 2025. "Real‐time detection of local no‐arbitrage violations," Quantitative Economics, Econometric Society, vol. 16(2), pages 459-495, May.
  • Handle: RePEc:wly:quante:v:16:y:2025:i:2:p:459-495
    DOI: 10.3982/QE2585
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    1. Li, Yifan & Nolte, Ingmar & Nolte, Sandra & Yu, Shifan, 2025. "Realized candlestick wicks," Journal of Econometrics, Elsevier, vol. 250(C).

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