2003/02/10 by Vladislav Kargin, Kargin, Vladislav
Economics, Econometrics and Finance · Mathematics · #49N05 #49N25 #49N90 #Economic theories and models #FOS: Economics and business #FOS: Mathematics #Financial Markets and Investment Strategies #Optimization and Control (math.OC) #Portfolio Management (q-fin.PM) #Stochastic processes and financial applications #math.OC #msc:49N05 #msc:49N25 #msc:49N90 #q-fin.PM
paper · pdf · doi:10.48550/arxiv.math/0302104
16 pages, no figures
openalex publication_date 2003/02/10 · arxiv created 2003/08/08 · arxiv updated 2009/11/30 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
This article examines arbitrage investment in a mispriced asset when the mispricing follows the Ornstein-Uhlenbeck process and a credit-constrained investor maximizes a generalization of the Kelly criterion. The optimal differentiable and threshold policies are derived. The optimal differentiable policy is linear with respect to mispricing and risk-free in the long run. The optimal threshold policy calls for investing immediately when the mispricing is greater than zero with the investment amount inversely proportional to the risk aversion parameter. The investment is risky even in the long run. The results are consistent with the belief that credit-constrained arbitrageurs should be risk-neutral if they are to engage in convergence trading.