So You Are Making Money in Financial Markets: Should You Tell Your Friends How?

7 Pages Posted: 28 Feb 2007

See all articles by Damien Challet

Damien Challet

CentraleSupélec; Encelade Capital SA

Date Written: February 23, 2007

Abstract

Constant price impact functions widely used in financial modelling strongly advise in favour of letting trusted friends exploit one's own arbitrage opportunities because they prevent correct arbitrage removal. Starting from the example of chain arbitrage exploitation, a consistency criterion is proposed. It is only fulfilled by non-constant impact functions. The role of the feedback of sequential market orders of the same kind on the order book is crucial for ensuring consistency at the smallest time scale.

Keywords: Arbitrage, price impact functions, paradox, feed-back

JEL Classification: G12, G14

Suggested Citation

Challet, Damien, So You Are Making Money in Financial Markets: Should You Tell Your Friends How? (February 23, 2007). Available at SSRN: https://ssrn.com/abstract=965474 or http://dx.doi.org/10.2139/ssrn.965474

Damien Challet (Contact Author)

CentraleSupélec ( email )

Labo MICS
3, rue Joliot-Curie
Gif-sur-Yvette, 91192
France

Encelade Capital SA ( email )

Chemin du Bochet 8
Sulpice, 1025
Switzerland

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