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Arbitrage Opportunities (arbitrage + opportunity)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

How efficient is the European football betting market?

JOURNAL OF FORECASTING, Issue 5 2009
Evidence from arbitrage, trading strategies
Abstract This paper assesses the international efficiency of the European football betting market by examining the forecastability of match outcomes on the basis of the information contained in different sets of online and fixed odds quoted by six major bookmakers. The paper also investigates the profitability of strategies based on: combined betting, simple heuristic rules, regression models and prediction encompassing. The empirical results show that combined betting across different bookmakers can lead to limited but highly profitable arbitrage opportunities. Simple trading rules and betting strategies based on forecast encompassing are found capable of also producing significant positive returns. Despite the deregulation, globalization and increased competition in the betting industry over recent years, the predictabilities and profits reported in this paper are not fully consistent with weak-form market efficiency. Copyright © 2008 John Wiley & Sons, Ltd. [source]

ASSET PRICING WITH NO EXOGENOUS PROBABILITY MEASURE

MATHEMATICAL FINANCE, Issue 1 2008
Gianluca Cassese
In this paper, we propose a model of financial markets in which agents have limited ability to trade and no probability is given from the outset. In the absence of arbitrage opportunities, assets are priced according to a probability measure that lacks countable additivity. Despite finite additivity, we obtain an explicit representation of the expected value with respect to the pricing measure, based on some new results on finitely additive measures. From this representation we derive an exact decomposition of the risk premium as the sum of the correlation of returns with the market price of risk and an additional term, the purely finitely additive premium, related to the jumps of the return process. We also discuss the implications of the absence of free lunches. [source]

Limited Arbitrage in Equity Markets

THE JOURNAL OF FINANCE, Issue 2 2002
Mark Mitchell
We examine 82 situations where the market value of a company is less than its subsidiary. These situations imply arbitrage opportunities, providing an ideal setting to study the risks and market frictions that prevent arbitrageurs from immediately forcing prices to fundamental values. For 30 percent of the sample, the link between the parent and its subsidiary is severed before the relative value discrepancy is corrected. Furthermore, returns to a specialized arbitrageur would be 50 percent larger if the path to convergence was smooth rather than as observed. Uncertainty about the distribution of returns and characteristics of the risks limits arbitrage. [source]

Box-spread arbitrage efficiency of Nifty index options: The Indian evidence

THE JOURNAL OF FUTURES MARKETS, Issue 6 2009
VipulArticle first published online: 1 APR 200
This study examines the market efficiency for the European style Nifty index options using the box-spread strategy. Time-stamped transactions data are used to identify the mispricing and arbitrage opportunities for options with this modelfree approach. Profit opportunities, after accounting for the transaction costs, are quite frequent, but do not persist even for two minutes. The mispricing is higher for the contracts with higher liquidity (immediacy) risk captured by the moneyness (the difference between the strike prices and the spot price) and the volatility of the underlying. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:544,562, 2009 [source]

The limits to stock index arbitrage: Examining S&P 500 futures and SPDRS

THE JOURNAL OF FUTURES MARKETS, Issue 12 2008
Nivine Richie
This study examines factors affecting stock index spot versus futures pricing and arbitrage opportunities by using the S&P 500 cash index and the S&P 500 Standard and Poor's Depository Receipt (SPDR) Exchange-Traded Fund (ETF) as "underlying cash assets." Potential limits to arbitrage when using the cash index are the staleness of the underlying cash index, trading costs, liquidity (volume) issues of the underlying assets, the existence of sufficient time to execute profitable arbitrage transactions, short sale restrictions, and the extent to which volatility affects mispricing. Alternatively, using the SPDR ETF as the underlying asset mitigates staleness and trading cost problems as well as the effects of volatility associated with the staleness of the cash index. Minute-by-minute prices are compared over different volatility levels to determine how these factors affect the limits of S&P 500 futures arbitrage. Employing the SPDR as the cash asset examines whether a liquid tradable single asset with low trading costs can be used for pricing and arbitrage purposes. The analysis examines how long mispricing lasts, the impact of volatility on mispricing, and whether sufficient volume exists to implement arbitrage. The minute-by-minute liquidity of the futures market is examined using a new transaction volume futures database. The results show that mispricings exist regardless of the choice of the underlying cash asset, with more negative mispricings for the SPDR relative to the S&P 500 cash index. Furthermore, mispricings are more frequent in high- and mid-volatility months than in low-volatility months and are associated with higher volume during high-volatility months. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1182,1205, 2008 [source]

Order imbalance and the dynamics of index and futures prices

THE JOURNAL OF FUTURES MARKETS, Issue 12 2007
Joseph K.W. Fung
This study uses transaction records of index futures and index stocks, with bid/ask price quotes, to examine the impact of stock market order imbalance on the dynamic behavior of index futures and cash index prices. Spurious correlation in the index is purged by using an estimate of the "true" index with highly synchronous and active quotes of individual stocks. A smooth transition autoregressive error correction model is used to describe the nonlinear dynamics of the index and futures prices. Order imbalance in the cash stock market is found to affect significantly the error correction dynamics of index and futures prices. Order imbalance impedes error correction particularly when the market impact of order imbalance works against the error correction force of the cash index, explaining why real potential arbitrage opportunities may persist over time. Incorporating order imbalance in the framework significantly improves its explanatory power. The findings indicate that a stock market microstructure that allows a quick resolution of order imbalance promotes dynamic arbitrage efficiency between futures and underlying stocks. The results also suggest that the unloading of cash stocks by portfolio managers in a falling market situation aggravates the price decline and increases the real cost of hedging with futures. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:1129,1157, 2007 [source]

Optimal No-Arbitrage Bounds on S&P 500 Index Options and the Volatility Smile

THE JOURNAL OF FUTURES MARKETS, Issue 12 2001
Patrick J. Dennis
This article shows that the volatility smile is not necessarily inconsistent with the Black,Scholes analysis. Specifically, when transaction costs are present, the absence of arbitrage opportunities does not dictate that there exists a unique price for an option. Rather, there exists a range of prices within which the option's price may fall and still be consistent with the Black,Scholes arbitrage pricing argument. This article uses a linear program (LP) cast in a binomial framework to determine the smallest possible range of prices for Standard & Poor's 500 Index options that are consistent with no arbitrage in the presence of transaction costs. The LP method employs dynamic trading in the underlying and risk-free assets as well as fixed positions in other options that trade on the same underlying security. One-way transaction-cost levels on the index, inclusive of the bid,ask spread, would have to be below six basis points for deviations from Black,Scholes pricing to present an arbitrage opportunity. Monte Carlo simulations are employed to assess the hedging error induced with a 12-period binomial model to approximate a continuous-time geometric Brownian motion. Once the risk caused by the hedging error is accounted for, transaction costs have to be well below three basis points for the arbitrage opportunity to be profitable two times out of five. This analysis indicates that market prices that deviate from those given by a constant-volatility option model, such as the Black,Scholes model, can be consistent with the absence of arbitrage in the presence of transaction costs. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1151,1179, 2001 [source]

Financial Frictions and Risky Corporate Debt

ECONOMIC NOTES, Issue 1 2007
Doriana Ruffino
We offer clarifications on Cooley and Quadrini (2001) regarding financial frictions and risky corporate debt pricing. Even in a frictionless world, the promised rate on corporate debt is not identical across firms and across capital structures and it is not equal to the risk-free rate. Frictions are unnecessary for credit spreads to arise. Only if the macroeconomy is in actuality risk free or risk neutral do interest rates on corporate debt reflect default probabilities. To the extent that the firm's entire financial structure is traded, a bias in credit spreads introduces an exploitable arbitrage opportunity. Re-establishing no-arbitrage, firm dynamics move in the opposite direction to Cooley and Quadrini's. [source]