Questions tagged [arbitrage]

The simultaneous purchase and sale of a financial security in order to profit from the difference in the security price during the trading activity.

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46
votes
4answers
6k views

How much data is needed to validate a short-horizon trading strategy?

Suppose one has an idea for a short-horizon trading strategy, which we will define as having an average holding period of under 1 week and a required latency between signal calculation and execution ...
4
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1answer
4k views

Calendar Arbitrage in a Vol Surface

I am trying to determine the condition such that my implied vol surface doesn't have calendar arbitrage. I have done research and found that one such condition is that total variance should increase ...
12
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1answer
9k views

Implied dividend estimation

I am looking at two different ways of estimating the expected / implied dividends from market data. 1. Dividend futures I know that this asset class is not very liquid and might not be ...
25
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1answer
3k views

How do different methods and techniques used in pairs trading compare?

I was going through the paper of Avellaneda (2008) on stat arb and I found it interesting that he uses asset returns vs. their respective ETFs to compute the s-score. I am wondering if anyone has ...
10
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1answer
4k views

Arbitrage opportunity interview question

I have seen this interview question mentioned in a couple of places: There are three call options on the market, with the same expiry and with strikes 10, 20, and 30. Suppose the call option with ...
10
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3answers
8k views

How to exploit calendar arbitrage?

Say we are looking at European Call options in a toy environment with zero deterministic interest rates, a stock paying no dividends, no repo rates etc... Let $C(T,K)$ be the price of a call with ...
8
votes
1answer
2k views

Arbitragefree Pricing: Q vs. P

I read that the Fundamental Theorem of Asset Pricing states, that a market is arbitrage-free if and only if there exists an equivalent martingale measure Q, under which the discounted asset price ...
8
votes
2answers
523 views

ETF Market Making - Locking profits via hedging

I am interested in deeply understanding the way ETF market makers operate to profit. I already know that market makers profit from buying at the bid price and selling at the ask price, and I am also ...
4
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1answer
846 views

Finding arbitrage opportunity

Find an arbitrage opportunity in this market. Can anyone explain how to mathematically solve this exercise with for example solving a system of linear equations?
4
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1answer
466 views

European Call price for an asset with mean reverting (Vasicek model) dynamics

Let's look at a stock with a mean reverting price dynamics: $$dS_t = a(S-S_0)dt + \sigma dW_t$$ If we let $\sigma=0.25$ and $a=-0.5$ then the variance of this process is: $$Var(S_t) = 0.199\sim0.2$$ ...
3
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2answers
613 views

Dumb question: is risk-neutral pricing taking conditional expectation?

Dumb question: is risk-neutral pricing taking conditional expectation? $\tag{1}$ In trying to recall intuition for risk-neutral pricing, I think I read that we should price derivatives risk-neutrally ...
2
votes
1answer
595 views

Black-Scholes evaluating the squared of the stock price

Consider a Black-Scholes model $S_t = 5\exp{(\sigma W_t + \mu t)}$, $B_t = \exp{(rt)}$, where $W_t$ is Brownian motion with respect to a given measure $\mathbb{P}$. Suppose you hold a forward contract ...
14
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3answers
11k views

Volatility arbitrage - how is the profit extracted?

Is there any paper that describes in detail how the profit is extracted in directional volatility bet (vol arb)? I mean in the case that I bet the realized volatility will be lower than currently ...
22
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2answers
2k views

Why isn't the Nelson-Siegel model arbitrage-free?

Assume $X_t$ is a multivariate Ornstein-Uhlenbeck process, i.e. $$dX_t=\sigma dB_t-AX_tdt$$ and the spot interest rate evolves by the following equation: $$r_t=a+b\cdot X_t.$$ After solving for $X_t$ ...
14
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2answers
5k views

SPX options vs VIX futures trading

Forward volatility implied by SPX options, and that of VIX futures get out of line. If there existed VIX SQUARED futures they could easily be replicated (and arbitraged) with a strip of SPX options. ...
5
votes
3answers
5k views

Arbitraging OANDA continuous rollover vs other brokers' discrete rollover

Most brokers compute rollover once a day (2200 GMT), but OANDA calculates it continuously. I thought I'd cleverly found an arbitrage opportunity, but it turns out OANDA knows about this and ...
2
votes
2answers
1k views

What is Toxic FX Flow debate?

So, basically I want to debate and find out the real reason behind being flag by ECNs and venues as "toxic". How to avoid being flagged? What kind of strategies are toxic and why? Below is an article ...
4
votes
2answers
699 views

Which is the correct definition of arbitrage?

Spin-off from here. In Tomas Bjork's Arbitrage Theory in Continuous Time (or here), $\exists$ 2 inconsistent definitions of arbitrage, which is correct? The first definition is for the single period ...
4
votes
1answer
1k views

Finding Arbitrage in two Puts

A European Put Option on a non-dividend paying stock with strike price 80 is currently priced at 8 and a put option on the same stock with strike price 90 is priced at 9. Is there an arbitrage ...
3
votes
1answer
3k views

Calibrating an Ornstein Uhlenbeck process on residuals of regression

I am trying a basic statistical arbitrage strategy as follows: Perform PCA on a log return series of a basket of stocks Regress returns against top principal components identified Calculate the ...
4
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2answers
413 views

Inconsistent Definition of Arbitrage in Bjork?

In Tomas Bjork's Arbitrage Theory in Continuous Time (or here), $\exists$ what seems to be 2 inconsistent definitions of arbitrage: The first definition is for the single period Binomial model The ...
1
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3answers
2k views

Arbitrage free implies complete market?

In Tomas Björk's Arbitrage Theory in Continuous Time (or here), $\exists$ this proposition It seems that to show that the model is complete, we must show that the claims are reachable. That is, we ...
6
votes
1answer
823 views

What research is available on the performance of convertible bond arbitrage models?

The basic principles of convertible bond arbitrage have been clear at least since Thorp and Kassouf (1967). For those who are not familiar, the arbitrage entails purchasing a convertible bond and ...
5
votes
2answers
750 views

Pricing when arbitrage is possible through Negative Probabilities or something else

Assume that we have a general one-period market model consisting of $d+1$ assets and $N$ states. Using a replicating portfolio $\phi$, determine $\Pi(0;X)$, the price of a European call option, with ...
3
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2answers
257 views

Definition of Arbitrage

Definition. An arbitrage is a portfolio $H$ ∈ $R^n$ such that • $H⋅P_0≤0≤H⋅P_1$ almost surely, and • $P(H⋅P_0=0=H⋅P_1)<1$. where $P_0$ and $P_1$ ∈ $R^n$ represent the prices at time $t=0,1$ ...
2
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2answers
207 views

Strike Arbitrage

In Stochastic Volatility Modelling, Chapter 2, the author derived the Dupire equation $$\mathbb{E}[\sigma_T^2|S_T = K] = 2\frac{\frac{dC}{dT} + qC +(r-q)K\frac{dC}{dK}}{K^2 \frac{d^2C}{dK^2}}.$$ The ...
2
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1answer
312 views

Boundary for European Put Option

As an entry level financial engineer, I'm learning about call-put parity, which helps us to get the boundary for call option: $S-Ke^{-rT}\leq c\leq S$, what about put option? Should its upper bound be ...
1
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0answers
221 views

How would you arbitrage this?

Assume it to be true that $dS = S\mu dt + \sigma(t)S dW$ where $\sigma$(t) is known. Consider a call option with expiry $T$, currently $t = 0$. For all $t \in [0,T]$, $\sigma(t) < \sigma_{impv}$ ...
1
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2answers
2k views

What‘s the definition of static arbitrage?

Could someone give the strict definition of static arbitrage? I know what the arbitrage means but have no idea about the term "Static". Thanks in advance!
2
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1answer
191 views

Law of One price and the Inconcistent pricing strategy

Background Information: A market satisfies the Law of One Price if every two self-financing strategies that replicate the same claim have the same initial value. An inconsistent pricing strategy is ...
1
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2answers
606 views

When looking for arbitrage among a LARGE amount of assets, is there an optimal way?

Looking for arbitrage opportunities when looking at 3 pairs of related currencies is easy. However if we assume that we have a large amount of currencies, is there an optimal way to swipe through them ...
0
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1answer
95 views

What do I call the combination of two or more prices when doing arbitrage?

Suppose that I’m doing forex arbitrage between multiple currencies. A possible arbitrage strategy is to combine the currency prices in pairs and then evaluate if there is a chance to make a profit. ...
-1
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1answer
408 views

If I am very fast (less than 10 microseconds latency) what would be the first strategy to execute? [closed]

Let's assume I found the holy grail of low-latency trading (which I didn't). For educational purposes, what would be the first strategy I would direct my trading code?
-1
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1answer
1k views

Calculating arbitrage- S&P 500 stocks vs S&P 500 Index future?

How exactly would I go about investigating whether the S&P 500 stocks were currently over-valued compared with the price of the S&P 500 Index futures contract? Is it just a case of taking each ...