On free lunches in random walk markets with short-sale constraints and small transaction costs, and weak convergence to Gaussian continuous-time processes
This paper considers a sequence of discrete-time random walk markets with a safe and a single risky investment opportunity, and gives conditions for the existence of arbitrages or free lunches with vanishing risk, of the form of waiting to buy and selling the next period, with no shorting, and furthermore for weak convergence of the random walk to a Gaussian continuous-time stochastic process. The conditions are given in terms of the kernel representation with respect to ordinary Brownian motion and the discretisation chosen. Arbitrage and free lunch with vanishing risk examples are established where the continuous-time analogue is arbitrage-free under small transaction costs - including for the semimartingale modifications of fractional Brownian motion suggested in the seminal Rogers (1997) article proving arbitrage in fBm models.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tommi Sottinen, 2001. "Fractional Brownian motion, random walks and binary market models," Finance and Stochastics, Springer, vol. 5(3), pages 343-355.
- Paolo Guasoni & Mikl\'os R\'asonyi & Walter Schachermayer, 2008. "Consistent price systems and face-lifting pricing under transaction costs," Papers 0803.4416, arXiv.org.
- L. C. G. Rogers, 1997. "Arbitrage with Fractional Brownian Motion," Mathematical Finance, Wiley Blackwell, vol. 7(1), pages 95-105.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1206.5756. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.