| Paper title: |
One-Penny Arbitrages, or: A Free Snack without a Free Lunch |
| Published in: | Issue 1, (Vol. 5) / 2011 |
| Publishing date: | 2010-04-29 |
| Pages: | 102-103 |
| Author(s): | CASTAGNOLI Erio, FAVERO Gino, TEBALDI Claudio |
| Abstract. | An arbitrage is a serious inefficiency of a financial market, and it is traditionally considered to completely disrupt a price system and to allow agents for growing unlimitedly rich. By means of a simple example, this paper points out that this is only true when dealing with positively homogeneous price systems; indeed, in more general financial market models (taking into consideration, e.g., liquidity limitations), arbitrages might just yield a light effect without overall critical consequences (allowing, in particular, to realise just a limited, and possibly very small, gain). |
| Keywords: | Arbitrage, Liquidity, Free Lunch, Positive Homogeneity |
| References: | 1. J. Ingersoll, Theory of Financial Decision Making, Totowa: Rowman & Littlefield, 1987. 2. E. Castagnoli, G. Favero, C. Tebaldi, “Effectiveness in Illiquid Markets,” in progress 3. E. Castagnoli, G. Favero, “Effectiveness under Frictions. The FTAP in the State Preference Model with Proportional Frictions,” unpublished 4. E. Jouini, “Price functionals with bid-ask spreads: an axiomatic approach,” J. Math. Econ., vol. 34, pp. 547-558, 2000. 5. N. El Karoui, M. C. Quenez, “Dynamic Programming and Pricing of Contingent Claims in an Incomplete Market,” SIAM J. Contr. & Opt., vol. 33(1), pp. 29-66, 1995. 6. F. Astic, N. Touzi, “No Arbitrage Conditions and Liquidity,” J. Math. Econ, vol. 43, pp. 692-708, 2007 7. J. Liu, F. A. Longstaff, “Losing Money on Arbitrage: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities,” Rev. Fin. Studies, vol. 17, pp. 611- 641, 2004 8. T. Pennanen, “Arbitrage and Deflators in Illiquid Markets”, to appear in Fin. & Stoch.. 9. E. Castagnoli, G. Favero, F. Maccheroni, Marchetto, il prezzatore perfetto. Elogio dell’internalita`, in progress |
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