Arbitrage under power
When one knows the correct value of a tradable asset and the asset price diverges from that value, future convergence may present a good trading opportunity. However, the trader still has to decide when and how aggressively to open the position, and when to close it. Michael Boguslavsky and Elena Boguslavskaya extend Mendez-Vivez, Morton & Naik’s model and give an elegant explicit solution. They also give a new possible explanation to several well-known market ‘anomalies’, including the turn-of-the-year effect
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