On weak notions of no-arbitrage in a 1D general diffusion market with interest rates
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arXiv
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| Format: | Preprint |
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2025
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| _version_ | 1866915203116957696 |
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| author | Anagnostakis, Alexis Criens, David Urusov, Mikhail |
| author_facet | Anagnostakis, Alexis Criens, David Urusov, Mikhail |
| contents | We establish deterministic necessary and sufficient conditions for the no-arbitrage notions "no increasing profit" (NIP), "no strong arbitrage" (NSA) and "no unbounded profit with bounded risk" (NUPBR) in one-dimensional general diffusion markets. These are markets with one risky asset, which is modeled as a regular continuous strong Markov process that is also a semimartingale, and a riskless asset that grows exponentially at a constant rate $r\in \mathbb{R}$. All deterministic criteria are provided in terms of the scale function and the speed measure of the risky asset process. Our study reveals a variety of surprising effects. For instance, irrespective of the interest rate, NIP is not excluded by reflecting boundaries or an irregular scale function. In the case of non-zero interest rates, it is even possible that NUPBR holds in the presence of reflecting boundaries and/or skew thresholds. In the zero interest rate regime, we also identify NSA as the minimal no arbitrage notion that excludes reflecting boundaries and that forces the scale function to be continuously differentiable with strictly positive absolutely continuous derivative, meaning that it is of the same form as for a stochastic differential equation. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2503_14078 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | On weak notions of no-arbitrage in a 1D general diffusion market with interest rates Anagnostakis, Alexis Criens, David Urusov, Mikhail Mathematical Finance Probability We establish deterministic necessary and sufficient conditions for the no-arbitrage notions "no increasing profit" (NIP), "no strong arbitrage" (NSA) and "no unbounded profit with bounded risk" (NUPBR) in one-dimensional general diffusion markets. These are markets with one risky asset, which is modeled as a regular continuous strong Markov process that is also a semimartingale, and a riskless asset that grows exponentially at a constant rate $r\in \mathbb{R}$. All deterministic criteria are provided in terms of the scale function and the speed measure of the risky asset process. Our study reveals a variety of surprising effects. For instance, irrespective of the interest rate, NIP is not excluded by reflecting boundaries or an irregular scale function. In the case of non-zero interest rates, it is even possible that NUPBR holds in the presence of reflecting boundaries and/or skew thresholds. In the zero interest rate regime, we also identify NSA as the minimal no arbitrage notion that excludes reflecting boundaries and that forces the scale function to be continuously differentiable with strictly positive absolutely continuous derivative, meaning that it is of the same form as for a stochastic differential equation. |
| title | On weak notions of no-arbitrage in a 1D general diffusion market with interest rates |
| topic | Mathematical Finance Probability |
| url | https://arxiv.org/abs/2503.14078 |