Optimal Arbitrage Strategies in Presence of Market Impacts

18 Pages Posted: 14 Sep 2007

See all articles by Valdo Durrleman

Valdo Durrleman

Ecole Polytechnique - Centre de Mathematiques Appliquees - CNRS

Serge Lhermitte

affiliation not provided to SSRN

Date Written: September 14, 2007

Abstract

We consider an arbitrageur who takes advantage of market misvaluations. The market misvaluation is assumed to be mean reverting around zero and to be affected by the arbitrageur's actions. We propose a simple realistic model and explicitly solve the problem and various extensions. We also look at the case where misvaluations are only partially observable. A separation principle is established for that problem: the misvaluation estimation problem and the optimal control problem can be dealt separately.

Keywords: arbitrage strategies, market impact

JEL Classification: G10

Suggested Citation

Durrleman, Valdo and Lhermitte, Serge, Optimal Arbitrage Strategies in Presence of Market Impacts (September 14, 2007). Available at SSRN: https://ssrn.com/abstract=1014650 or http://dx.doi.org/10.2139/ssrn.1014650

Valdo Durrleman (Contact Author)

Ecole Polytechnique - Centre de Mathematiques Appliquees - CNRS ( email )

Palaiseau, 91128
France

Serge Lhermitte

affiliation not provided to SSRN ( email )

No Address Available

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