We provide a monotonic transformation of an initial diffusion with a level-dependent diffusion parameter that yields a second, deterministic parameter process. Altering the diffusion parameter while maintaining the original Brownian motion at the expense of the drift can be viewed as a...

This paper studies the implications of absence of arbitrage in economies where: (i) trade takes place in transaction time, (ii) there is a single state variable whose transaction-time price path is binomial, (iii) there are riskfree bonds with calendar-time maturities, and (iv) the relation...

We prove a general version of the super-replication theorem, which applies to Kabanov’s model of foreign exchange markets under proportional transaction costs. The market is described by a matrix-valued càdlàg bid-ask process $$(\Pi_t)_{t\in [0,T]}$$ evolving in continuous time. We propose a...

This paper expands on a procedure to arbitrage mispriced assets against the benchmark provided by the Security Market Line, but using only separation portfolios to put up a feasible portfolio with the same beta as the mispriced asset and the least total risk among other alternative portfolios....

Stocks with large increases in call implied volatilities over the previous month tend to have high future returns while stocks with large increases in put implied volatilities over the previous month tend to have low future returns. Sorting stocks ranked into decile portfolios by past call...

Minimal discounted distorted expectations across a range of stress levels are employed to model risk acceptability in markets. Interactions between discounting and stress levels used in measure changes are accommodated by lowering discount rates for the higher stress levels. Acceptability...