Asymptotic Arbitrage in Large Financial Markets with Friction
CEREMADE, UMR CNRS 7534, Paris-Dauphine University.
University of Vienna
April 12, 2012
In the modern version of Arbitrage Pricing Theory suggested by Kabanov and Kramkov the fundamental financially meaningful concept is an asymptotic arbitrage. The 'real world' large market is represented by a sequence of 'models' and, though each of them is arbitrage free, investors may obtain non-risky prots in the limit. Mathematically, absence of the asymptotic arbitrage is expressed as contiguity of envelopes of the sets of equivalent martingale measures and objective probabilities. The classical theory deals with frictionless markets. In the present paper we extend it to markets with transaction costs. Assuming that each model admits consistent price systems, we relate them with families of probability measures and consider their upper and lower envelopes. The main result concerns the necessary and sufficient conditions for absence of asymptotic arbitrage opportunities of the first and second kinds expressed in terms of contiguity. We provide also more specific conditions involving Hellinger processes and give applications to particular models of large financial markets.
Number of Pages in PDF File: 30
Keywords: large financial market, asymptotic arbitrage, transaction costs, contiguity
JEL Classification: G11, G13working papers series
Date posted: April 13, 2012
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