No arbitrage and lead-lag relationships

Takaki Hayashi, Yuta Koike

Research output: Contribution to journalArticlepeer-review

Abstract

The existence of time-lagged cross-correlations between the returns of a pair of assets, which is known as the lead-lag relationship, is a well-known stylized fact in financial econometrics. Recently some continuous-time models have been proposed to take account of the lead-lag relationship. Such a model does not follow a semimartingale as long as the lead-lag relationship is present, so it admits an arbitrage without market frictions. In this paper we show that they are free of arbitrage if we take account of market frictions such as the presence of minimal waiting time on subsequent transactions or transaction costs.

60G17, 60G15, 91B70

Original languageEnglish
JournalUnknown Journal
Publication statusPublished - 2017 Dec 28

Keywords

  • Arbitrage
  • Cheridito class
  • Conditional full support
  • Discrete trading
  • Lead-lag relationship
  • Transaction costs

ASJC Scopus subject areas

  • General

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