Arbitrage opportunities and their implications to derivative hedging

Stephanos Panayides

Physica A: Statistical Mechanics and its Applications, 2006, vol. 361, issue 1, 289-296

Abstract: We explore the role that random arbitrage opportunities play in hedging financial derivatives. We extend the asymptotic pricing theory presented by Fedotov and Panayides [Stochastic arbitrage return and its implication for option pricing, Physica A 345 (2005) 207–217] for the case of hedging a derivative when arbitrage opportunities are present in the market. We restrict ourselves to finding hedging confidence intervals that can be adapted to the amount of arbitrage risk an investor will permit to be exposed to. The resulting hedging bands are independent of the detailed statistical characteristics of the arbitrage opportunities.

Keywords: Derivative hedging; Random arbitrage; Hedging ratio (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:361:y:2006:i:1:p:289-296

DOI: 10.1016/j.physa.2005.06.077

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