So You Are Making Money in Financial Markets: Should You Tell Your Friends How?
7 Pages Posted: 28 Feb 2007
Date Written: February 23, 2007
Abstract
Constant price impact functions widely used in financial modelling strongly advise in favour of letting trusted friends exploit one's own arbitrage opportunities because they prevent correct arbitrage removal. Starting from the example of chain arbitrage exploitation, a consistency criterion is proposed. It is only fulfilled by non-constant impact functions. The role of the feedback of sequential market orders of the same kind on the order book is crucial for ensuring consistency at the smallest time scale.
Keywords: Arbitrage, price impact functions, paradox, feed-back
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
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