Excerpt from Arbitrage With Holding Costs: An Utility-Based Approach Section I describes how holding costs can transform riskless arbitrage opportunities into potentially profitable but risky investment projects. It then argues that holding costs are important in many different arbitrage contexts. Section II presents a model of arbitrage activity. The scene is set with a holding cost structure and an exogenous mispricing process that, in combination, do not admit riskless arbitrage opportunities. The paper then derives ...
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Excerpt from Arbitrage With Holding Costs: An Utility-Based Approach Section I describes how holding costs can transform riskless arbitrage opportunities into potentially profitable but risky investment projects. It then argues that holding costs are important in many different arbitrage contexts. Section II presents a model of arbitrage activity. The scene is set with a holding cost structure and an exogenous mispricing process that, in combination, do not admit riskless arbitrage opportunities. The paper then derives the partial differential equation governing a risk averse arbitrageur's optimal, dynamic strategy. For the case of negative exponential utility it is shown that 1) arbitrageurs will hold a position if and only if the potential gains are large enough, 2) the position is finite, and 3) arbitrageurs will take a position even with an instantaneously negative expected return since any future losses will be accompanied by greater arbitrage opportunities. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at ... This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.
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