Fragility of arbitrage and bubbles in local martingale diffusion models

Guasoni, Paolo and Rásonyi, Miklós (2015) Fragility of arbitrage and bubbles in local martingale diffusion models. FINANCE AND STOCHASTICS, 19 (2). pp. 215-231. ISSN 0949-2984

Preview	Text guasoni_rasonyi_fragile.pdf - Submitted Version Download (180kB) | Preview
	Text art_10.1007_s00780_015_0256_0_u.pdf - Published Version Restricted to Registered users only Download (607kB) | Request a copy

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. © 2015, Springer-Verlag Berlin Heidelberg.

Actions (login required)

Edit Item