Ordering Arbitrage Portfolios and Finding Arbitrage Opportunities

47 Pages Posted: 19 Apr 2021 Last revised: 25 Jul 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

Concepts are introduced and applied for analyzing and selecting arbitrage portfolios in the face of ambiguity about risk preferences and initial positions. A Stochastic Arbitrage Opportunity is defined as a zero-cost investment portfolio that enhances every feasible benchmark portfolio for all admissible utility functions. The alternative to the existence of such investment opportunities is the existence of a solution to 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 is appealing for all risk-averse stock investors with a wide range of initial position and sufficiently low transactions costs, by mixing multiple factor portfolios with high after-cost Information Ratio, low mutual correlation and negative downside beta. The findings weaken the case for risk-based explanations for the profitability of factor investing

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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