IDEAS home Printed from https://ideas.repec.org/p/uts/rpaper/385.html
   My bibliography  Save this paper

Sure Profits via Flash Strategies and the Impossibility of Predictable Jumps

Author

Listed:

Abstract

In an arbitrage-free financial market, asset prices should not exhibit jumps of a predictable magnitude at predictable times. We provide a rigorous formulation of this result in a fully general setting, only allowing for buy-and-hold positions and without imposing any semimartingale restriction. We show that asset prices do not exhibit predictable jumps if and only if there is no possibility of obtaining sure profits via high-frequency limits of buy-and-hold trading strategies. Our results imply that, under minimal assumptions, price changes occurring at scheduled dates should only be due to unanticipated information releases.

Suggested Citation

  • Claudio Fontana & Markus Pelger & Eckhard Platen, 2017. "Sure Profits via Flash Strategies and the Impossibility of Predictable Jumps," Research Paper Series 385, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:385
    as

    Download full text from publisher

    File URL: https://www.uts.edu.au/sites/default/files/QFR-rp385.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Roll, Richard, 1977. "An analytic valuation formula for unprotected American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 5(2), pages 251-258, November.
    2. Evans, Kevin P., 2011. "Intraday jumps and US macroeconomic news announcements," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2511-2527, October.
    3. Ioannis Karatzas & Constantinos Kardaras, 2007. "The numéraire portfolio in semimartingale financial models," Finance and Stochastics, Springer, vol. 11(4), pages 447-493, October.
    4. Rangel, José Gonzalo, 2011. "Macroeconomic news, announcements, and stock market jump intensity dynamics," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1263-1276, May.
    5. Geske, Robert, 1979. "A note on an analytical valuation formula for unprotected American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 7(4), pages 375-380, December.
    6. Monika Piazzesi, 2001. "An Econometric Model of the Yield Curve with Macroeconomic Jump Effects," NBER Working Papers 8246, National Bureau of Economic Research, Inc.
    7. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    8. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    9. David C. Heath & Robert A. Jarrow, 2008. "Ex-Dividend Stock Price Behavior and Arbitrage Opportunities," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 3, pages 47-60 World Scientific Publishing Co. Pte. Ltd..
    10. Jonathan Brogaard & Terrence Hendershott & Ryan Riordan, 2014. "High-Frequency Trading and Price Discovery," Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2267-2306.
    11. Piazzesi, Monika, 2001. "An Econometric Model of the Yield Curve With Macroeconomic Jump Effects," University of California at Los Angeles, Anderson Graduate School of Management qt5946p7hn, Anderson Graduate School of Management, UCLA.
    12. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    13. Suzanne S. Lee & Per A. Mykland, 2008. "Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2535-2563, November.
    14. Suzanne S. Lee, 2012. "Jumps and Information Flow in Financial Markets," Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 439-479.
    15. Battauz, Anna, 2003. "Quadratic hedging for asset derivatives with discrete stochastic dividends," Insurance: Mathematics and Economics, Elsevier, vol. 32(2), pages 229-243, April.
    16. Hendershott, Terrence & Livdan, Dmitry & Schürhoff, Norman, 2015. "Are institutions informed about news?," Journal of Financial Economics, Elsevier, vol. 117(2), pages 249-287.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Absence of arbitrage; predictable time; semimartingale; high-frequency trading;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:385. 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: (Duncan Ford). General contact details of provider: http://edirc.repec.org/data/qfutsau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.