1 Department of Management Engineering, Technical University of Denmark2 Management Science, Department of Management Engineering, Technical University of Denmark3 Vienna University of Economics and Business4 University of Liechtenstein
We derive no-arbitrage bounds for expected excess returns to generate scenarios used in financial applications. The bounds allow to distinguish three regions: one where arbitrage opportunities will never exist, a second where arbitrage may be present, and a third, where arbitrage opportunities will always exist. No-arbitrage bounds are derived in closed form for a given covariance matrix using the least possible number of scenarios. Empirical examples illustrate the practical potential of knowing these bounds.
European Journal of Operational Research, 2014, Vol 236, Issue 2, p. 657-663