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Approximate arbitrage with limit orders

12 November 2018 at 1:30 PM - 3:00 PM

Room 210, Campus on Viale Romania 32

Speaker: Davide Tedeschini, UBS Bank Lugano

Title: Approximate arbitrage with limit orders
Abstract: Almost riskless investment opportunities represent a fundamental innovation of the recent developments in asset pricing theory. In this paper, I introduce a related trading scheme involving two options and two asynchronous operations: a limit order for one of the assets and a market order for the other one, once the limit order is executed. A model integrating option pricing and order arrivals explains the proximity of this strategy to a pure arbitrage. In particular, satisfying the requisites of the approximate arbitrage opportunities, I therefore refer to it as a limit order approximate arbitrage. An empirical study on a novel option data set confirms that market participants actively invest in these trades. The analysis also reveals the presence of short-living pure arbitrage opportunities in the market, promptly taken by the arbitrageurs.