Gauge Theory of Arbitrage (3)

No-arbitrage pricing removes investors’ attitude towards risk from pricing equations. Such attitude depends on human interaction and human psychology, and on factors which are difficult to model, which are unstable and change over time.

In non-equilibrium pricing with virtual arbitrage we effectively come back to the question of risk pricing because there are no truly non-arbitrage (risk-neutral) portfolios anymore. The question of pricing once again includes pricing of risk – risk of mark to market pain and risk of losses in early unwinds. Therefore one might say that 40 years of delusion in non-arbitrage pricing came full circle and returned to the original problem of modeling of human beings and their interactions.

Description of the theory and applications can be found in “Physics of Finance. Gauge modeling in non-equilibrium pricing”, Wiley & Sons 2001

First paper on the subject was Kirill Ilinski, “Physics of Finance”, (October 1997)

Main references can be found in here

<< Previous     Next >>

Back to pages Kirill Ilinski, Reseach