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Asymptotic Arbitrage In The Heston Model

Author

Listed:
  • FATMA HABA

    (Department of Mathematics, Université Tunis El Manar, Tunisia)

  • ANTOINE JACQUIER

    (Department of Mathematics, Imperial College London, South Kensington Campus, London SW7 2AZ, UK)

Abstract

In this paper, we introduce a new form of asymptotic arbitrage, which we call a partial asymptotic arbitrage, half-way between those of Föllmer & Schachermayer (2007) [Mathematics and Financial Economics 1 (34), 213–249] and Kabanov & Kramkov (1998) [Finance and Stochastics 2, 143–172]. In the context of the Heston model, we establish a precise link between the set of equivalent martingale measures, the ergodicity of the underlying variance process and this partial asymptotic arbitrage. In contrast to Föllmer & Schachermayer (2007) [Mathematics and Financial Economics 1 (34), 213–249], our result does not assume a suitable condition on the stock price process to allow for (partial) asymptotic arbitrage.

Suggested Citation

  • Fatma Haba & Antoine Jacquier, 2015. "Asymptotic Arbitrage In The Heston Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(08), pages 1-18, December.
    • Handle: RePEc:wsi:ijtafx:v:18:y::i:08:n:s0219024915500557
    DOI: 10.1142/S0219024915500557
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    References listed on IDEAS

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    1. Martin Mbele Bidima & Miklos Rasonyi, 2012. "On long-term arbitrage opportunities in Markovian models of financial markets," Annals of Operations Research, Springer, vol. 200(1), pages 131-146, November.
    2. Fouque,Jean-Pierre & Papanicolaou,George & Sircar,Ronnie & Sølna,Knut, 2011. "Multiscale Stochastic Volatility for Equity, Interest Rate, and Credit Derivatives," Cambridge Books, Cambridge University Press, number 9780521843584.
    3. repec:dau:papers:123456789/10555 is not listed on IDEAS
    4. Irene Klein & Emmanuel Lépinette & Lavinia Perez-Ostafe, 2014. "Asymptotic arbitrage with small transaction costs," Finance and Stochastics, Springer, vol. 18(4), pages 917-939, October.
    5. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    6. Y.M. Kabanov & D.O. Kramkov, 1998. "Asymptotic arbitrage in large financial markets," Finance and Stochastics, Springer, vol. 2(2), pages 143-172.
    7. Freddy Delbaen & Walter Schachermayer, 1998. "A Simple Counterexample to Several Problems in the Theory of Asset Pricing," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 1-11, January.
    8. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    9. Dmitry Rokhlin, 2008. "Asymptotic arbitrage and numéraire portfolios in large financial markets," Finance and Stochastics, Springer, vol. 12(2), pages 173-194, April.
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    Cited by:

    1. Daniel Guterding, 2023. "Sparse Modeling Approach to the Arbitrage-Free Interpolation of Plain-Vanilla Option Prices and Implied Volatilities," Risks, MDPI, vol. 11(5), pages 1-24, April.

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