Discretization of continuous-time arbitrage strategies in financial markets with fractional Brownian motion

Kerstin Lamert, Benjamin R. Auer and Ralf Wunderlich

Papers from arXiv.org

Abstract: This study evaluates the practical usefulness of continuous-time arbitrage strategies designed to exploit serial correlation in fractional financial markets. Specifically, we revisit the strategies of Shiryaev (1998) and Salopek (1998) and transfer them to a real-world setting by distretizing their dynamics and introducing transaction costs. In Monte Carlo simulations with various market and trading parameter settings as well as a formal analysis of discretization error, we show that both are promising with respect to terminal portfolio values and loss probabilities. These features and complementary sparsity make them worth serious consideration in the toolkit of quantitative investors.

Date: 2023-11, Revised 2024-12
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