Both models are based on a spread, which has to be as stationary / mean reverting as possible. $ yt = \beta0 + \beta1 xt + \epsilon_t $ In pairs trading, $yt$ and $xt$ are log prices, and (e.g.) the... Read More

A similar question for put option has been discussed in this question: Finding Arbitrage in two Puts. Basically, the call option payoff is a convex function of the strike. Then the call option price... Read More

Interesting question! I don't think you will get very far just using mid prices, though...any sufficiently sensitive test will flag nearly every situation as an arbitrage since $A\text{mid}+B\text{mi... Read More

One easy way to cross-check that is to compute option implied correlations. Those correlations are model free and only depend on the current day option prices and they are indeed stable. For a nice... Read More

Start with http://en.wikipedia.org/wiki/Statistical_arbitrage and the references therein. Especially Avellaneda (technical) and Bookstaber (historical, how Bamberger and Thorp got the whole thing sta... Read More

To say a curve is arbitrage-free, you need to pick an arbitrage path; a series of trades which, when followed, yield a net profit without creating exposure. We neglect counterparty exposure here, sin... Read More

The following link has a good summary of a typical pair trading strategy: https://www.quantstart.com/articles/Backtesting-An-Intraday-Mean-Reversion-Pairs-Strategy-Between-SPY-And-IWM It actually has... Read More

If ${\frac {\partial^2 C} {\partial K ^2}}$ was zero, then the price-strike curve would just be a straight sloping-downwards line, and it would cost the same to buy either two call options at strike... Read More

This is possible and many people do it, but the loop can be significantly delayed by the time it takes to transfer fiat between exchanges. There may be automation software out there, but it is likely... Read More

The two are very similar. To understand the difference notice that given a discrete sample space $\Omega=\{\omega1,\omega2…\omegaS\}$ the price of any payoff can be computed if we define the state pr... Read More