A sufficient and necessary condition for arbitrage-free pricing |
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| Authors: | Chen Guo |
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| Affiliation: | Faculty of Administration, University of Ottawa , 136 Jean-Jacques Lussier, Ottawa, Ontario, K1N 6N5, Canada |
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| Abstract: | This paper derives a sufficient and necessary condition for arbitrage-free pricing, by the mathematical definition of linear dependency. It states that any pricing function that can be expressed as a linear combination of some of its partial derivatives inherently possesses the arbitrage-free property. This condition can serve as a quick ‘reality check’ to help search for arbitrage-free asset pricing. |
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| Keywords: | arbitrage pricing partial differential equation linear dependency Taylor series |
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