No-arbitrage bounds for financial scenarios

Alois Geyer, Michael Hanke and Alex Weissensteiner

European Journal of Operational Research, 2014, vol. 236, issue 2, 657-663

Abstract: We derive no-arbitrage bounds for expected excess returns to generate scenarios used in financial applications. The bounds allow to distinguish three regions: one where arbitrage opportunities will never exist, a second where arbitrage may be present, and a third, where arbitrage opportunities will always exist. No-arbitrage bounds are derived in closed form for a given covariance matrix using the least possible number of scenarios. Empirical examples illustrate the practical potential of knowing these bounds.

Keywords: Finance; Scenarios; No-arbitrage bounds; Financial optimization (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:236:y:2014:i:2:p:657-663

DOI: 10.1016/j.ejor.2014.01.027

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