Abstract Most insurance contracts are inherently linked to financial markets, be it via interest rates, or—as hybrid products like equity‐linked life and variable annuities—directly stocks or indices. However, not for trade except sometimes as surrender the selling office. This excludes situation of arbitrage by buying at different prices. Furthermore, insurer uses private information on top pu...

We derive the optimal investment policy of a risk-averse investor in a market where there is a textbook arbitrage opportunity, but where liabilities must be secured by collateral. We find that it is often optimal to underinvest in the arbitrage by taking a smaller position than collateral constraints allow. Even when the optimal policy is followed, the arbitrage portfolio typically experiences ...

Since Hart's [5] and Werner's [10] seminal papers, several conditions have been proposed to show the existence of equilibrium in an asset exchange economy with short-selling. In this note, we discuss the relationship between two no-arbitrage conditions. The ̄rst condition is the assumption that the individually rational utility set U is compact, as considered by Dana, Le Van and Magnien [1]. Th...

Strict local martingales may admit arbitrage opportunities with respect to the class of simple trading strategies. (Since there is no possibility of using doubling strategies in this framework, the losses are not assumed to be bounded from below.) We show that for a class of non-negative strict local martingales, the strong Markov property implies the no arbitrage property with respect to the c...

This article presents a new definition of market completeness that is independent of the notions of no arbitrage and equivalent martingale measures. Our definition has many advantages, all shown herein. First, it preserves the Second Fundamental Theorem of Asset Pricing, even in complex economies. Second, under our definition, the market can be complete yet arbitrage opportunities exist. This i...

We are interested in computation of locating arbitrage in financial markets with frictions. We consider a model with a finite number of financial assets and a finite number of possible states of nature. We derive a negative result on computational complexity of arbitrage in the case when securities are traded in integer numbers of shares and with a maximum amount of shares that can be bought fo...

This paper investigates the optimality of sharp incentives in contracts where output prices are set at the time of contracting but are random in nature. It shows that when prices are specified with error, schemes involving sharp incentives might result in substantial deviations from first-best output levels. The randomness of prices creates arbitrage opportunities that are exploited by agents p...