On optimal arbitrage
In a Markovian model for a financial market, we characterize the best arbitrage with respect to the market portfolio that can be achieved using nonanticipative investment strategies, in terms of the smallest positive solution to a parabolic partial differential inequality; this is determined entirely on the basis of the covariance structure of the model. The solution is intimately related to properties of strict local martingales and is used to generate the investment strategy which realizes the best possible arbitrage. Some extensions to non-Markovian situations are also presented.
|Date of creation:||Oct 2010|
|Date of revision:|
|Publication status:||Published in Annals of Applied Probability 2010, Vol. 20, No. 4, 1179-1204|
|Contact details of provider:|| Web page: http://arxiv.org/|
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- Eckhard Platen & Hardy Hulley, 2008. "Hedging for the Long Run," Research Paper Series 214, Quantitative Finance Research Centre, University of Technology, Sydney.
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