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Exploiting arbitrage requires short selling

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  • Eckhard Platen
  • Stefan Tappe

Abstract

We show that in a financial market given by semimartingales an arbitrage opportunity, provided it exists, can only be exploited through short selling. This finding provides a theoretical basis for differences in regulation for financial services providers that are allowed to go short and those without short sales. The privilege to be allowed to short sell gives access to potential arbitrage opportunities, which creates by design a bankruptcy risk.

Suggested Citation

  • Eckhard Platen & Stefan Tappe, 2020. "Exploiting arbitrage requires short selling," Papers 2011.12523, arXiv.org, revised Sep 2022.
    • Handle: RePEc:arx:papers:2011.12523
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/5630 is not listed on IDEAS
    2. Paolo Guasoni & Miklós Rásonyi, 2015. "Fragility of arbitrage and bubbles in local martingale diffusion models," Finance and Stochastics, Springer, vol. 19(2), pages 215-231, April.
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    13. Delia Coculescu & Monique Jeanblanc, 2019. "Some no-arbitrage rules under short-sales constraints, and applications to converging asset prices," Finance and Stochastics, Springer, vol. 23(2), pages 397-421, April.
    14. Eckhard Platen & Stefan Tappe, 2020. "The Fundamental Theorem of Asset Pricing for Self-Financing Portfolios," Research Paper Series 411, Quantitative Finance Research Centre, University of Technology, Sydney.
    15. Sergio Pulido, 2014. "The fundamental theorem of asset pricing, the hedging problem and maximal claims in financial markets with short sales prohibitions," Post-Print hal-02265271, HAL.
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