Contrary to the claims made by several authors, a financial market model in which the price of a risky security follows a reflected geometric Brownian motion is not arbitrage-free. In fact, such a model is unsuitable for contingent claim valuation because it violates even the weakest...

To investigate the effect of short-selling constraints on investor behaviour, we formulate an optimal stopping model in which the decision to cover a short position is affected by two short sale-specific frictions—margin risk and recall risk. Margin risk is introduced by assuming that a short...

We develop two models for index futures arbitrage that take the financing constraints faced by real-world arbitrageurs into account. Our models predict that the price of an index futures contract and the value of its underlying index should deviate further from their theoretical cost-of-carry...