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- Title
The Relationship between Arbitrage and First Order Stochastic Dominance.
- Authors
JARROW, ROBERT
- Abstract
This paper joins together two fields of research in financial economics. The first field studies stochastic dominance, while the second field studies arbitrage pricing. The two fields are linked together through the derivation and the proof of a characterization theorem. The characterization theorem gives necessary and sufficient conditions for the existence of arbitrage opportunities in terms of the existence of two assets, one of which first order stochastically dominates the other and the price of a particular contingent claim. Examples are provided to demonstrate the theorem's content.
- Subjects
ECONOMICS; ARBITRAGE; PRICING; STOCHASTIC analysis; FINANCE; SPECULATION; ASSETS (Accounting); STOCHASTIC processes; INVESTMENT mathematics; ACCOUNTING for contingencies
- Publication
Journal of Finance (Wiley-Blackwell), 1986, Vol 41, Issue 4, p915
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1986.tb04556.x