Dry Markets and Statistical Arbitrage Bounds for European Derivatives

• Autor(a) principal: Amaro de Matos, João
• Data de Publicação: 2006
• Outros Autores: Lacerda, Ana
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/83088

We derive statistical arbitrage bounds for the buying and selling price of European derivatives under incomplete markets. In this paper, incompleteness is generated due to the fact that the market is dry, i.e., the underlying asset cannot be transacted at certain points in time. In particular, we rene the notion of statistical arbitrage in order to extend the procedure for the case where dryness is random, i.e., at each point in time the asset can be transacted with a given probability. We analytically characterize several properties of the statistical arbitrage-free interval, show that it is narrower than the super-replication interval and dominates somehow alternative intervals provided in the literature. Moreover, we show that, for sufficiently incomplete markets, the statistical arbitrage interval contains the reservation price of the derivative.