Abstract
In this paper we study the computational problem of arbitrage in a frictional market with a finite number of bonds and finite and discrete times to maturity. Types of frictions under consideration include fixed and proportional transaction costs, bid-ask spreads, taxes, and upper bounds on the number of units for transaction. We obtain some negative result on computational difficulty in general for arbitrage under those frictions: It is NP-complete to identify whether there exists a cash-and-carry arbitrage transaction and it is NP-hard to find an optimal cash-and-carry arbitrage transaction.
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Cai, Mc., Deng, X., Li, Z. (2005). Computation of Arbitrage in a Financial Market with Various Types of Frictions. In: Megiddo, N., Xu, Y., Zhu, B. (eds) Algorithmic Applications in Management. AAIM 2005. Lecture Notes in Computer Science, vol 3521. Springer, Berlin, Heidelberg. https://doi.org/10.1007/11496199_30
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DOI: https://doi.org/10.1007/11496199_30
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-26224-4
Online ISBN: 978-3-540-32440-9
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