Mean-Reverting Market Model: Speculative Opportunities and Non-Arbitrage

Nikolai Dokuchaev

Applied Mathematical Finance, 2007, vol. 14, issue 4, 319-337

Abstract: The paper studies arbitrage opportunities and possible speculative opportunities for diffusion mean-reverting market models. It is shown that the Novikov condition is satisfied for any time interval and for any set of parameters. It is non-trivial because the appreciation rate has Gaussian distribution converging to a stationary limit. It follows that the mean-reverting model is arbitrage-free for any finite time interval. Further, it is shown that this model still allows some speculative opportunities: a gain for a wide enough set of expected utilities can be achieved for a strategy that does not require any hypothesis on market parameters and does not use estimation of these parameters.

Keywords: Diffusion market; mean-reverting model; arbitrage; technical analysis; self-financing strategies; universal portfolio (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (5)

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DOI: 10.1080/13504860701255078

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