For any positive diffusion with minimal regularity, there exists a semimartingale with uniformly close paths that is a martingale under an equivalent probability. As a result, in models of asset prices based on such diffusions, arbitrage and bubbles alike disappear under proportional transaction costs or under small model mis-specifications. Thus, local martingale diffusion models of arbitrage and bubbles are not robust to small trading and monitoring frictions.
Fragility of arbitrage and bubbles in local martingale diffusion models / Guasoni P; Rasonyi M. - In: FINANCE AND STOCHASTICS. - ISSN 0949-2984. - STAMPA. - 19:2(2015), pp. 215-231. [10.1007/s00780-015-0256-0]
Fragility of arbitrage and bubbles in local martingale diffusion models
Guasoni P
Co-primo
;
2015
Abstract
For any positive diffusion with minimal regularity, there exists a semimartingale with uniformly close paths that is a martingale under an equivalent probability. As a result, in models of asset prices based on such diffusions, arbitrage and bubbles alike disappear under proportional transaction costs or under small model mis-specifications. Thus, local martingale diffusion models of arbitrage and bubbles are not robust to small trading and monitoring frictions.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.