Fragility of arbitrage and bubbles in local martingale diffusion models

Paolo Guasoni () and Miklós Rásonyi

Finance and Stochastics, 2015, vol. 19, issue 2, 215-231

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. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Arbitrage; Bubbles; Transaction costs; Local martingales; 91G10; 62P05; G12 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s00780-015-0256-0

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