Derivative pricing with virtual arbitrage

Details Derivative pricing with virtual arbitrage Derivative pricing with virtual arbitrage

1999-02-03

arxiv.org/abs/cond-mat/9902046v1

Physics

Condensed Matter

Statistical Mechanics

Latex, 10 pages

Scientific paper

In this paper we derive an effective equation for derivative pricing which accounts for the presence of virtual arbitrage opportunities and their elimination by the market. We model the arbitrage return by a stochastic process and find an equation for the average derivative price. This is an integro-differential equation which, in the absence of the virtual arbitrage or for an infinitely fast market reaction, reduces to the Black-Scholes equation. Explicit formulas are obtained for European call and put vanilla options.

Affiliated with

Also associated with

No associations

Rating

Derivative pricing with virtual arbitrage does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Derivative pricing with virtual arbitrage, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Derivative pricing with virtual arbitrage will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-147686