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arXiv · 2201.05312

Arbitrage Problems with Reflected Geometric Brownian Motion

Dean Buckner·Kevin Dowd·Hardy Hulley
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Abstract

Contrary to the claims made by several authors, a financial market model in which the price of a risky security follows a reflected geometric Brownian motion is not arbitrage-free. In fact, such models violate even the weakest no-arbitrage condition considered in the literature. Consequently, they do not admit num\'eraire portfolios or equivalent risk-neutral probability measures, which makes them totally unsuitable for contingent claim valuation. Unsurprisingly, the published option pricing formulae for such models violate textbook no-arbitrage bounds.

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Dean Buckner, Kevin Dowd, Hardy Hulley. 2022-01-14. Arbitrage Problems with Reflected Geometric Brownian Motion. https://arxiv.org/abs/2201.05312

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