Dry Markets and Statistical Arbitrage Bounds for European Derivatives

FEUNL Working Paper No. 479

57 Pages Posted: 19 Feb 2006

See all articles by Joao Amaro de Matos

Joao Amaro de Matos

Nova School of Business and Economics

Ana Lacerda

New University of Lisbon - Faculdade de Economia

Date Written: 2006

Abstract

We derive statistical arbitrage bounds for the buying and selling price of European derivatives under incomplete markets. In this paper, incompleteness is generated due to the fact that the market is dry, i.e., the underlying asset cannot be transacted at certain points in time. In particular, we re¯ne the notion of statistical arbitrage in order to extend the procedure for the case where dryness is random, i.e., at each point in time the asset can be transacted with a given probability. We analytically characterize several properties of the statistical arbitrage free interval, show that it is narrower than the super-replication interval and dominates somehow alternative intervals provided in the literature. Moreover, we show that, for sufficiently incomplete markets, the statistical arbitrage interval contains the reservation price of the derivative.

Suggested Citation

Amaro de Matos, Joao and Lacerda, Ana, Dry Markets and Statistical Arbitrage Bounds for European Derivatives (2006). FEUNL Working Paper No. 479. Available at SSRN: https://ssrn.com/abstract=882793 or http://dx.doi.org/10.2139/ssrn.882793

Joao Amaro de Matos (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-038
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~amatos

Ana Lacerda

New University of Lisbon - Faculdade de Economia ( email )

Campus de Campolide
Lisboa, 1099-032
Portugal

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