Algebraic Properties of Arbitrage: An Application to Additivity of Discount Functions
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Author/sCruz Rambaud, Salvador
Background: This paper aims to characterize the absence of arbitrage in the context of the Arbitrage Theory proposed by Kreps (1981) and Clark (2000) which involves a certain number of well-known financial markets. More specifically, the framework of this model is a linear (topological) space X in which a (convex) cone C defines a vector ordering. There exist markets for only some of the contingent claims of X which assign a price pi to the marketed claim mi . The main purpose of this paper is to provide some novel algebraic characterizations of the no arbitrage condition and specifically to derive the decomposability of discount functions with this approach. Methods: Traditionally, this topic has been focused from a topological or probabilistic point of view. However, in this manuscript the treatment of this topic has been by using purely algebraic tools. Results: We have characterized the absence of arbitrage by only using algebraic concepts, properties and structures. Thus, we have ...