Fragility of arbitrage and bubbles in local martingale diffusion models

<Para ID="Par1">For any positive diffusion with minimal regularity, there exists a semimartingale with uniformly close paths that is a martingale under an equivalent probability. As a result, in models of asset prices based on such diffusions, arbitrage and bubbles alike disappear under proportional transaction costs or under small model mis-specifications. Thus, local martingale diffusion models of arbitrage and bubbles are not robust to small trading and monitoring frictions. Copyright Springer-Verlag Berlin Heidelberg 2015