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2003•RePEc: Research Papers in EconomicsOpen access

Narrowing the no-arbitrage bounds

Robert G. Chambers, John Quiggin, Chambers, Robert G., Quiggin, John

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Abstract

The broadness of no-arbitrage bounds on asset prices has led to a number of suggestions on how to narrow them. This paper points out that another, apparently unexploited, opportunity exists for narrowing the no-arbitrage bounds, using information on the production technology. The key analytic concept is that of the derivative-cost function, which is used to define a notion of arbitrage that encompasses both the basis assets and stochastic production opportunities

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The broadness of no-arbitrage bounds on asset prices has led to a number of suggestions on how to narrow them. This paper points out that another, apparently unexploited, opportunity exists for narrowing the no-arbitrage bounds, using information on the production technology. The key analytic concept is that of the derivative-cost function, which is used to define a notion of arbitrage that encompasses both the basis assets and stochastic production opportunities

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Available abstract

The broadness of no-arbitrage bounds on asset prices has led to a number of suggestions on how to narrow them. This paper points out that another, apparently unexploited, opportunity exists for narrowing the no-arbitrage bounds, using information on the production technology. The key analytic concept is that of the derivative-cost function, which is used to define a notion of arbitrage that encompasses both the basis assets and stochastic production opportunities

Key concepts: Arbitrage, Asset (computer security), Production (economics), Key (lock), Derivative (finance), Function (biology), Fundamental theorem of asset pricing, Economics

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