No-arbitrage bounds for financial scenarios

@article{Geyer2014NoarbitrageBF,
  title={No-arbitrage bounds for financial scenarios},
  author={Alois Geyer and Michael Hanke and Alex Weissensteiner},
  journal={European Journal of Operational Research},
  year={2014},
  volume={236},
  pages={657-663}
}
We derive no-arbitrage bounds for expected excess returns to generate scenarios used in financial applications. The bounds allow to distinguish three regions: one where arbitrage opportunities will never exist, a second where arbitrage may be present, and a third, where arbitrage opportunities will always exist. No-arbitrage bounds are derived in closed form for a given covariance matrix using the least possible number of scenarios. Empirical examples illustrate the practical potential of… CONTINUE READING

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