Arbitrage-Free Condition

(redirected from No-Arbitrage Conditions)

Arbitrage-Free Condition

A situation in which all relevant assets are priced appropriately and there is no way for one's gains to outpace market gains without taking on more risk. Assuming an arbitrage-free condition is important in financial models, thought its existence is mainly theoretical.
References in periodicals archive ?
As in the Vasicek (1977) model, the no-arbitrage conditions restrict the relative pricing of bonds with different maturities while remaining silent about all other conditions that characterize the equilibrium in the economy.
These conditions are derived from equilibrium in the market for manufactured goods, the steady-state no-arbitrage conditions, and an equalized rate of return for domestic, and offshored production.
Next, the effective labor supplies (Equation [14]), product development costs (Equation [16]), and the wage equations for the labor market can be substituted into the no-arbitrage conditions to obtain
A quick observation of the no-arbitrage conditions makes it clear that when both domestic and offshored production exist the associated operating profits must be equal, [pi] =[[pi].
First, we rewrite the no-arbitrage condition for Northern production.
Now, we substitute this condition into the steady-state no-arbitrage condition above to obtain
Next, bond pricing is introduced in a world of perfect certainty, in which no-arbitrage conditions are first worked out algebraically.
The central implication of the no-arbitrage conditions is that the risk premium for an asset can be decomposed into the amount of risk (measured by volatility) and the price of risk (which reflects investors' attitudes toward risk), where the price of risk is common to all assets.
In this case, the payoffs are so closely related that the price of the option is completely determined by the no-arbitrage condition (that is, the Black-Scholes model).
If there were no uncertainty [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII], the no-arbitrage condition would be that both net cash flows in the next period must be zero.
It first presents theoretical pricing relationships implied by no-arbitrage conditions.
To overcome problems in earlier studies, this study tests theoretical pricing relationships based on no-arbitrage conditions for European stock index options.