Rough paths in idealized financial markets

This paper considers possible price paths of a financial security in an idealized market. Its main result is that the variation index of typical price paths is at most 2, in this sense, typical price paths are not rougher than typical paths of Brownian motion. We do not make any stochastic assumptions and only assume that the price path is positive and right-continuous. The qualification "typical" means that there is a trading strategy (constructed explicitly in the proof) that risks only one monetary unit but brings infinite capital when the variation index of the realized price path exceeds 2. The paper also reviews some known results for continuous price paths and lists several open problems.Comment: 21 pages, this version adds (in Appendix C) a reference to new results in the foundations of game-theoretic probability based on Hardin and Taylor's work on hat puzzle

Generalized backward induction: Justification for a folk algorithm

I introduce axiomatically infinite sequential games that extend Kuhn’s classical framework. Infinite games allow for (a) imperfect information, (b) an infinite horizon, and (c) infinite action sets. A generalized backward induction (GBI) procedure is defined for all such games over the roots of subgames. A strategy profile that survives backward pruning is called a backward induction solution (BIS). The main result of this paper finds that, similar to finite games of perfect information, the sets of BIS and subgame perfect equilibria (SPE) coincide for both pure strategies and for behavioral strategies that satisfy the conditions of finite support and finite crossing. Additionally, I discuss five examples of well-known games and political economy models that can be solved with GBI but not classic backward induction (BI). The contributions of this paper include (a) the axiomatization of a class of infinite games, (b) the extension of backward induction to infinite games, and (c) the proof that BIS and SPEs are identical for infinite games