Maximal Arbitrage

Klaus Schürger

Bonn Econ Discussion Papers from University of Bonn, Germany

Abstract: Let S=(S_t), t=0,1,...,T (T being finite), be an adapted R^d-valued process. Each component process of S might be interpreted as the price process of a certain security. A trading strategy H=(H_t), t= 1,...,T, is a predictable R^d-valued process. A strategy H is called extreme if it represents a maximal arbitrage opportunity. By this we mean that H generates at time T a nonnegative portfolio value which is positive with maximal probability. Let $F^e$ denote the set of all states of the world at which the portfolio value at time T, generated by an extreme strategy (which is shown to exist), is equal to zero. We characterize those subsets of F^e, on which no arbitrage opportunities exist.

Keywords: Conglomerate; Nature of the firm; Market Vs hierarchies (search for similar items in EconPapers)
JEL-codes: G12 G13 D40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2002-05

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