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Statistical Arbitrage with Default and Collateral
D52 - Incomplete Markets
G11 - Portfolio Choice
G12 - Asset Pricing
In this paper we study the implications of the absence of statistical arbitrage opportunities (SAO) in a two-period incomplete market economy where default is allowed but there are collateral requirements. We study the existence of state price deflators and the existence of a solution for the individual optimality problem, obtaining modified versions of the fundamental theorems of asset pricing. Then, we address the existence of equilibrium.