Fragility of Arbitrage and Bubbles in Diffusion Models

@inproceedings{Guasoniy2011FragilityOA,
  title={Fragility of Arbitrage and Bubbles in Diffusion Models},
  author={Paolo Guasoniy and Mikl{\'o}s R{\'a}sonyi},
  year={2011}
}
For any positive diffusion with minimal regularity, there exists a semimartingale, with paths uniformly close on the logarithmic scale, which is a martingale under an equivalent probability. As a result, in models of asset prices based on such diffusions, arbitrage and bubbles alike disappear under proportional transaction costs, or under small model misspecifications. This result sheds new light on well-known examples like the three-dimensional Bessel process and its inverse. 
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9 Citations

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