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Statistical arbitrage in the Black–Scholes framework

Ahmet Göncü
2014 Quantitative finance (Print)  
In this study we prove the existence of statistical arbitrage opportunities in the Black-Scholes framework by considering trading strategies that consists of borrowing from the risk free rate and taking a long position in the stock until it hits a deterministic barrier level. We derive analytical formulas for the expected value, variance, and probability of loss for the discounted cumulative trading profits. No-statistical arbitrage condition is derived for the Black-Scholes framework, which
more » ... framework, which imposes a constraint on the Sharpe ratio of the stock. Furthermore, we verify our theoretical results via extensive Monte Carlo simulations.
doi:10.1080/14697688.2014.961531 fatcat:gcfobqdyj5fjbkmvkegtzs7r7e