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Arbitrage without borrowing or short selling?

Jani Lukkarinen and Mikko S. Pakkanen

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Abstract: We show that a trader, who starts with no initial wealth and is not allowed to borrow money or short sell assets, is theoretically able to attain positive wealth by continuous trading, provided that she has perfect foresight of future asset prices, given by a continuous semimartingale. Such an arbitrage strategy can be constructed as a process of finite variation that satisfies a seemingly innocuous self-financing condition, formulated using a pathwise Riemann-Stieltjes integral. Our result exemplifies the potential intricacies of formulating economically meaningful self-financing conditions in continuous time, when one leaves the conventional arbitrage-free framework.

New Economics Papers: this item is included in nep-fmk and nep-pr~
Date: 2016-04, Revised 2016-10
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Published in Mathematics and Financial Economics 2017, Vol. 11, No. 3, 263-274

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