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Statistical Arbitrage with Default and Collateral

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  • José Fajardo

Abstract

In this paper we study the implications of the absence of statistical arbitrage opportunities (SAO) in a two-period incomplete market economy where default is allowed but there are collateral requirements. We study the existence of state price deflators and the existence of a solution for the individual optimality problem, obtaining modified versions of the fundamental theorems of asset pricing. Then, we address the existence of equilibrium.

Suggested Citation

  • José Fajardo, 2008. "Statistical Arbitrage with Default and Collateral," Working Papers w200808, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w200808
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    References listed on IDEAS

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    1. Esteves, Rui Pedro & Reis, Jaime & Ferramosca, Fabiano, 2009. "Market Integration in the Golden Periphery. The Lisbon/London Exchange, 1854-1891," Explorations in Economic History, Elsevier, vol. 46(3), pages 324-345, July.
    2. Aloisio Araujo & Mário Rui Páscoa & Juan Pablo Torres-Martínez, 2002. "Collateral Avoids Ponzi Schemes in Incomplete Markets," Econometrica, Econometric Society, vol. 70(4), pages 1613-1638, July.
    3. Araujo, Aloisio & Fajardo, Jose & Pascoa, Mario R., 2005. "Endogenous collateral," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 439-462, August.
    4. Joao Amaro de Matos & Ana Lacerda, 2006. "Dry markets and statistical arbitrage bounds for European derivatives," Nova SBE Working Paper Series wp479, Universidade Nova de Lisboa, Nova School of Business and Economics.
    5. Orrillo, Jaime, 2005. "Collateral once again," Economics Letters, Elsevier, vol. 87(1), pages 27-33, April.
    6. Fajardo, Jose, 2005. "A note on arbitrage and exogenous collateral," Mathematical Social Sciences, Elsevier, vol. 50(3), pages 336-341, November.
    7. Oleg Bondarenko, 2003. "Statistical Arbitrage and Securities Prices," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 875-919, July.
    8. Felix Kubler & Karl Schmedders, 2003. "Stationary Equilibria in Asset-Pricing Models with Incomplete Markets and Collateral," Econometrica, Econometric Society, vol. 71(6), pages 1767-1793, November.
    9. Antonio E. Bernardo & Olivier Ledoit, 2000. "Gain, Loss, and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 144-172, February.
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    Cited by:

    1. José Fajardo, 2010. "Behavioral arbitrage with collateral and uncertain deliveries," Annals of Finance, Springer, vol. 6(2), pages 241-254, March.

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