Spontaneous symmetry breaking of arbitrage

TL;DR

This paper applies the concept of spontaneous symmetry breaking to arbitrage modeling, showing that it can improve strategy performance and risk management in financial markets.

Contribution

It introduces a novel application of symmetry breaking to arbitrage, modeling phase transitions between arbitrage and no-arbitrage states.

Findings

Symmetry breaking improves momentum strategy performance.

The model outperforms naive momentum strategies in US and South Korean markets.

Better risk measures are achieved with the symmetry breaking approach.

Abstract

We introduce the concept of spontaneous symmetry breaking to arbitrage modeling. In the model, the arbitrage strategy is considered as being in the symmetry breaking phase and the phase transition between arbitrage mode and no-arbitrage mode is triggered by a control parameter. We estimate the control parameter for momentum strategy with real historical data. The momentum strategy aided by symmetry breaking shows stronger performance and has a better risk measure than the naive momentum strategy in U.S. and South Korean markets.