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Pathwise Portfolio Theory and Market Viability

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  • Ioannis Karatzas
  • Donghan Kim

Abstract

The theory of portfolios, and its allied notions and fundamental results concerning growth optimality, the num\'eraire property, and ``market viability'' -- which rules out the possibility of financing nontrivial future liability streams starting with arbitrarily small initial capital -- is developed in a pathwise setting, completely devoid of probabilistic considerations. The approach replaces the familiar semimartingale decomposition of stochastic analysis for assets' returns, by decompositions generated through suitable trend extractors and their associated residual paths; then deploys F\"ollmer's celebrated pathwise version of classical It\^o integration and calculus. The resulting growth-num\'eraire and viability-boundedness equivalences bear considerable similarities to their semimartingale counterparts, but need not collapse into a single equivalence class in the pathwise setting; this separation is illustrated by two examples.

Suggested Citation

  • Ioannis Karatzas & Donghan Kim, 2026. "Pathwise Portfolio Theory and Market Viability," Papers 2607.18705, arXiv.org.
    • Handle: RePEc:arx:papers:2607.18705
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    References listed on IDEAS

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    1. Alexander Schied & Leo Speiser & Iryna Voloshchenko, 2016. "Model-free portfolio theory and its functional master formula," Papers 1606.03325, arXiv.org, revised May 2018.
    2. Ioannis Karatzas & Constantinos Kardaras, 2007. "The numéraire portfolio in semimartingale financial models," Finance and Stochastics, Springer, vol. 11(4), pages 447-493, October.
    3. Nicolas Perkowski & David J. Promel, 2013. "Pathwise stochastic integrals for model free finance," Papers 1311.6187, arXiv.org, revised Jun 2016.
    4. Henry Chiu & Rama Cont, 2023. "A model‐free approach to continuous‐time finance," Mathematical Finance, Wiley Blackwell, vol. 33(2), pages 257-273, April.
    5. Erhan Bayraktar & Donghan Kim & Abhishek Tilva, 2024. "Arbitrage theory in a market of stochastic dimension," Mathematical Finance, Wiley Blackwell, vol. 34(3), pages 847-895, July.
    6. Andrew L. Allan & Christa Cuchiero & Chong Liu & David J. Prömel, 2023. "Model‐free portfolio theory: A rough path approach," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 709-765, July.
    7. Ioannis Karatzas & Donghan Kim, 2020. "Trading strategies generated pathwise by functions of market weights," Finance and Stochastics, Springer, vol. 24(2), pages 423-463, April.
    8. Constantinos Kardaras, 2012. "Market viability via absence of arbitrage of the first kind," Finance and Stochastics, Springer, vol. 16(4), pages 651-667, October.
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