Minimum Risk Arbitrage with Risky Financial Contracts

Mustafa C. Pinar (mustafapbilkent.edu.tr)

Abstract: For a set of financial securities specified by their expected returns and variance/covariances we propose the concept of minimum risk arbitrage, characterize conditions under which such opportunities may exist. We use conic duality and convex analysis to derive these characterizations. For practical computation a decidability result on the existence of an arbitrage opportunity is derived. Extension to the case of convex transaction costs is studied

Keywords: Financial Securities, Arbitrage, Conic Duality, Second-order Cone Programming, Generalized Farkas Lemma

Category 1: Applications -- OR and Management Sciences (Finance and Economics )

Category 2: Linear, Cone and Semidefinite Programming (Second-Order Cone Programming )

Category 3: Robust Optimization

Citation: Technical Report, Department of Industrial Engineering Bilkent University, Ankara, Turkey.

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Entry Submitted: 02/19/2001
Entry Accepted: 02/20/2001
Entry Last Modified: 02/19/2001

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