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Perhaps not the most encouraging answer, but: I would think that it is contingent upon the specific implementation, magnitude, regularity, and transiency of arbitrage available as well as the volatility estimate time-scale. In a very simple case, the existence of arbitrage opportunities would likely result in larger fraction of informed traders (relative to ...


If you look at it from a mathematical point of view - presence of arbitrage should not matter for volatility estimates. Absence of arbitrage can be associated with the existence of an equivalent martingale measure for the bank account numeraire. (first fundamental theorem of asset pricing) Let's assume the real world process is something like ...

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