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Condensed Matter > Statistical Mechanics

arXiv:cond-mat/9902046 (cond-mat)
[Submitted on 3 Feb 1999]

Title:Derivative pricing with virtual arbitrage

Authors:Kirill Ilinski, Alexander Stepanenko
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Abstract: 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.
Comments: Latex, 10 pages
Subjects: Statistical Mechanics (cond-mat.stat-mech); Pricing of Securities (q-fin.PR)
Cite as: arXiv:cond-mat/9902046 [cond-mat.stat-mech]
  (or arXiv:cond-mat/9902046v1 [cond-mat.stat-mech] for this version)
  https://doi.org/10.48550/arXiv.cond-mat/9902046

Submission history

From: Kirill Ilinski [view email]
[v1] Wed, 3 Feb 1999 12:28:40 UTC (9 KB)
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