The analysis of finite security markets using martingales

Abstract

The theory of finite security markets developed by Harrison and Pliska [1] used the separating hyperplane theorem to establish the relationship between the lack of arbitrage opportunities and the existence of a certain martingale measure. In this paper we treat this theory by examining certain geometric properties of the sample paths of the price process, that is, we focus on the price increments of the stocks between one time period to the next and convert them to martingale differences through an equivalent change of measure. Thus, in contrast to Harrison and Pliska&s functional analytic derivation, our approach is based on probabilistic methods and allows a geometric interpretation which not only provides a connection to linear programming but also yields an algorithm for analyzing finite security markets. Moreover, we can make precise the connection between diverse expressions of economic equilibrium such as ‘absence of arbitrage’, ‘martingale property, and ‘complementary slackness property’.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 64 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.