Exploiting arbitrage requires short selling

Eckhard Platen; Stefan Tappe

doi:10.3934/fmf.2023008

Article Contents

2023, Volume 2, Issue 3: 265-282. Doi: 10.3934/fmf.2023008 open access

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Exploiting arbitrage requires short selling

Eckhard Platen^1, , and
Stefan Tappe^2,

1.
University of Technology Sydney, Australia
2.
Albert Ludwig University of Freiburg, Germany

^*Corresponding author: Eckhard Platen
^*Corresponding author: Eckhard Platen

Received: July 2022

Revised: November 2022

Early access: March 28, 2023

Published online: March 28, 2023

The second author is supported by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) – project number 444121509.

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Abstract

We show that in a financial market given by semimartingales an arbitrage opportunity, provided it exists, can only be exploited through short selling. This finding provides a theoretical basis for differences in regulation for financial services providers that are allowed to go short and those without short sales. The privilege to be allowed to short sell gives access to potential arbitrage opportunities, which creates by design a bankruptcy risk.

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Mathematics Subject Classification: Primary: 91B02, 91B70; Secondary: 60G48.

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References

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