Dynamic Arbitrage Gaps for Financial Assets: In a Non Linear and Chaotic Price Adjustment Process

Abstract

In this paper we are concerned with the existence of a dynamic arbitrage gap that evolves out of an adjustment process for disequilibrium prices, within a complex dynamics framework which takes into account the market microstructure and transactions costs. Although this gap exhibits non linear and chaotic behavior, it doesn't preclude effective arbitrage transactions from taking place in real markets. Moreover, it may explain much better those factors which usually impede actual perfect arbitrage. Besides, this dynamic arbitrage gap depends upon a truly financial gap that accounts for unexpected events and superior information on the professional dealers' side. In this way, we can learn much more about dynamical adjustment processes from financial assets, making the arbitrage gap instrumental to set about real arbitrage positions. Finally, the dynamic arbitrage gap could become useful when coping with financial crisis as far as some basic parameters' range of values for which the dynamics becomes chaotic could be measured in advance.