Ordering Arbitrage Portfolios and Finding Arbitrage Opportunities

39 Pages Posted: 19 Apr 2021 Last revised: 22 Feb 2022

See all articles by Stelios Arvanitis

Stelios Arvanitis

Athens University of Economics and Business

Thierry Post

Graduate School of Business of Nazarbayev University

Date Written: April 17, 2021

Abstract

Abstract Concepts are introduced and applied for analyzing and selecting arbitrage portfolios in the face of ambiguity about risk preferences and initial portfolios. A Stochastic Arbitrage Opportunity is defined as a zero-cost overlay that enhances every feasible benchmark portfolio for all relevant risk-averse utility functions. The alternative to the existence of such opportunities is the solvability of a dual system of asset pricing restrictions based on a class of stochastic discount factors. Feasible approaches to numerical optimization and statistical inference are discussed. Empirical results suggest that equity factor investing can produce robust Stochastic Arbitrage Opportunities for all risk-averse stock investors with sufficiently low transactions costs, by mixing multiple factor portfolios with high after-cost Information Ratio, low mutual correlation and negative downside beta.

Keywords: Portfolio analysis; Arbitrage portfolios; Asset pricing; Incomplete markets; Factor Investing

JEL Classification: C61, D81, G11

Suggested Citation

Arvanitis, Stelios and Post, Thierry, Ordering Arbitrage Portfolios and Finding Arbitrage Opportunities (April 17, 2021). Available at SSRN: https://ssrn.com/abstract=3828368 or http://dx.doi.org/10.2139/ssrn.3828368

Stelios Arvanitis

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
GREECE

Thierry Post (Contact Author)

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

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