Generalized Stochastic Arbitrage Opportunities
Arvanitis S. Post T.
July 2024INFORMS Inst.for Operations Res.and the Management Sciences
Management Science
2024#70Issue 74629 - 4648 pp.
Concepts are introduced and applied for analyzing and selecting arbitrage portfolios in the face of uncertainty about initial positions and risk preferences. A stochastic arbitrage opportunity is defined as a zero-cost investment portfolio that enhances every feasible host portfolio for all admissible utility functions. The alternative to the existence of such investment opportunities is the existence of a solution to a dual system of asset pricing restrictions based on a class of stochastic discount factors. Feasible approaches to numerical optimization and statistical inference are discussed. Empirical results suggest that equity factor investing is appealing for all risk-averse stock investors with a wide range of initial position and sufficiently low transactions costs by mixing multiple factor portfolios with high after-cost appraisal ratios, low mutual correlation, and negative exposures to the relevant host portfolios. These findings weaken the case for risk-based explanations for the profitability of factor investing. Copyright:
arbitrage portfolios , asset pricing , factor investing , incomplete markets , portfolio analysis
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Department of Economics, Athens University of Economics and Business, Athens, 10434, Greece
Graduate School of Business, Nazarbayev University, Astana, 010000, Kazakhstan
Department of Economics
Graduate School of Business
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