Year: 2014
Type: preprint
Abstract: In this study we prove the existence of statistical arbitrage opportunities in the Black-Scholes framework by considering trading strategies that consists of borrowing from the risk free rate and taking a long position in the stock until it hits a deterministic barrier level. We derive analytical formulas for the expected value, variance, and probability of loss for the discounted cumulative trading profits. No-statistical arbitrage condition is derived for the Black-Scholes framework, which imposes a constraint on the Sharpe ratio of the stock. Furthermore, we verify our theoretical results via extensive Monte Carlo simulations.
Author: Goncu, Ahmet
Institutions: Boğaziçi University, Xi’an Jiaotong-Liverpool University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
Funder: Florida State University
OpenAlex ID: W2951586793