Since the middle regime [theta] < [ECT.sub.t-k] [less than or equal to] [[theta].sub.+] can be interpreted as a
no-arbitrage condition, it allows the identification of short-term arbitrage opportunities in the lower ([ECT.sub.t-k] < [[theta].sub.-]) and in the upper ([ECT.sub.t-k] > [[theta].sub.+]) regimes, when they occur.
As noted by Blanchard and Watson (1982), when the bubble either bursts (with probability 1 - [pi]), or has a price increase with probability [pi], a non-bursting bubble has to grow at a rate 1 + r/[pi] - 1, in order to satisfy the
no-arbitrage condition and yield a net expected return r.
In fact, some have argued that because of frictions or inability to practically hedge, no-arbitrage arguments should not necessarily apply, or the
no-arbitrage condition should not be required in a fair value framework.
Under ideal conditions, the
no-arbitrage condition stipulates a relationship between short-term and long-term interest rates on securities of comparable credit quality.
First, we rewrite the
no-arbitrage condition for Northern production.
We begin with the
no-arbitrage condition. Not only does it express agents' required rates of return to both types of capital, but it also can be used to show how the accumulation of factors occurs:
We can derive the risk-neutral probabilities of the entire evolutionary process of the R&D project based on the
no-arbitrage condition. According to the estimated cash flows derived from the R&D project, its fair value can be calculated by a backward procedure with respect to the risk-neutral probabilities.
Using the expression for profits (5) in the
no-arbitrage condition (8), and rearranging terms, one can find that: (14)
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).
To derive a closed form expression for the market value of the firm in model 1 we invoke the
no-arbitrage condition. This states that the expected returns from holding equity (the sum of dividends D and capital gains [Mathematical Expression Omitted] net of tax) must be in line with those from holding bonds (the nominal interest rate [r.sub.B] net of tax).
What is relevant is whether a
no-arbitrage condition holds which equalizes rates of return (possibly adjusted for risk) on assets in different locations.
The
no-arbitrage condition for a foreign asset with an income of X*(s) and its domestic perfect substitute yielding X*(s)e(s) is