Abstract
Brownian-motion-linked pricing models predict the existence of derivatives whose value at risk in short positions is lower than their price. The derivative sale plus the price investment in riskless assets becomes self-financing with negative risk. Repeating over and over this strategy, the price remains zero, but the risk tends to minus infinity. This paper reports results of empirical studies about the performance of this strategy. The American SP-500 and the German DAX-30 are involved. In both cases the index is beaten by simple buy and hold strategies containing riskless assets and short options. This finding may be interesting to practitioners and theoretically relevant. Firstly, the market can be beaten in an orthodox way, since results of Financial Economics inspire the methodology. Secondly, the risk never tends to minus infinity in practice. Perhaps the theoretical behavior in tails of Brownian-motion-linked models should be revisited.
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