Department of Economics and Business Economics

Arbitrage without borrowing or short selling?

Research output: ResearchWorking paper

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  • rp16_13

    Final published version, 610 KB, PDF-document

  • Mikko Pakkanen
  • Jani Lukkarinen
    Jani LukkarinenUniversity of Helsinki,Finland
We show that a trader, who starts with no initial wealth and is not allowed to borrow money or short sell assets, is theoretically able to attain positive wealth by continuous trading, provided that she has perfect foresight of future asset prices, given by a continuous semimartingale. Such an arbitrage strategy can be constructed as a process of finite variation that satisfies a seemingly innocuous self-financing condition, formulated using a pathwise Riemann-Stieltjes integral. Our result exemplifies the potential intricacies of formulating economically meaningful self-financing conditions in continuous time, when one leaves the conventional arbitrage-free framework.
Original languageEnglish
Place of PublicationAarhus
PublisherInstitut for Økonomi, Århus Universitet
Number of pages13
StatePublished - 27 Apr 2016
SeriesCREATES Research Papers
Number2016-13

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