Inflecting No-Arbitrage in Terms of Linear Duality
Type
working paper
Date Issued
1997
Author(s)
Abstract
Arbitrage theory is based on a single fundamental assumption corresponding to an intuitively straightforward principle: 'There is no free lunch!'. Basically, market participants are all assumed to be greedy, i.e. they prefer more to less. This reasoning results in the existence of equilibrium prices. Depending on the economic context, prices refer to assets, states, interest rates, etc. A basic model of the no arbitrage approach applies to the one-period setting with different outcome states as well as to the multiperiod deterministic context. A generalization can be formulated applicable to the multiperiod stochastic situation including both payments and frictions. It allows pricing within the framework of discrete models obtained by scenario tree analysis, for instance.
Language
English
HSG Classification
not classified
Refereed
No
Publisher
Institute for Operations Research, University of St. Gallen
Publisher place
St. Gallen, CH
Subject(s)
Division(s)
Eprints ID
7231