Economics, Econometrics and Finance
a year ago

Financial models with reflected Brownian motion found to violate no-arbitrage conditions.

Finance and Stochastics
Arbitrage problems with reflected geometric Brownian motion
Dean Buckner, Kevin Dowd, Hardy Hulley

Paper Summary

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The financial market model discussed in the article, where the price of a risky security follows a reflected geometric Brownian motion, is not free from arbitrage opportunities. This means that the model does not allow for certain important financial calculations, like valuing contingent claims. The option pricing formulas derived from this model go against basic no-arbitrage principles.