Free Lunches with Vanishing Risks Most Likely Exist
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arXiv
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| Format: | Preprint |
| Published: |
2025
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| _version_ | 1866918121000927232 |
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| author | Platen, Eckhard Fergusson, Kevin |
| author_facet | Platen, Eckhard Fergusson, Kevin |
| contents | The hypothesis that there do not exist free lunches with vanishing risk (FLVRs) in the real market underpins the popular risk-neutral pricing and hedging methodology in quantitative finance. The paper documents the fact that this hypothesis can be safely rejected. It performs extremely accurately the hedging of an extreme-maturity zero-coupon bond (ZCB). This hedge is part of a portfolio that starts with zero initial wealth and invests dynamically in a total return stock market index and the savings account to generate at the maturity date of the extreme-maturity ZCB a strictly positive amount with strictly positive probability, which represents an FLVR. The fact that FLVRs naturally exist in the real market can be accommodated theoretically under the benchmark approach. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2508_07108 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Free Lunches with Vanishing Risks Most Likely Exist Platen, Eckhard Fergusson, Kevin Mathematical Finance 62P05, 60G35, 62P20 The hypothesis that there do not exist free lunches with vanishing risk (FLVRs) in the real market underpins the popular risk-neutral pricing and hedging methodology in quantitative finance. The paper documents the fact that this hypothesis can be safely rejected. It performs extremely accurately the hedging of an extreme-maturity zero-coupon bond (ZCB). This hedge is part of a portfolio that starts with zero initial wealth and invests dynamically in a total return stock market index and the savings account to generate at the maturity date of the extreme-maturity ZCB a strictly positive amount with strictly positive probability, which represents an FLVR. The fact that FLVRs naturally exist in the real market can be accommodated theoretically under the benchmark approach. |
| title | Free Lunches with Vanishing Risks Most Likely Exist |
| topic | Mathematical Finance 62P05, 60G35, 62P20 |
| url | https://arxiv.org/abs/2508.07108 |