Arbitrage-Free Condition

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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 ?

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.

Price Adjustments and Transaction Costs in the European Natural Gas Market

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.

Credit Growth, Rational Bubbles and Economic Efficiency

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.

Marketability Discounts, Fair Value, and the Forgotten Market Participant: When Do Discounts Represent Distortions?

Under ideal conditions, the no-arbitrage condition stipulates a relationship between short-term and long-term interest rates on securities of comparable credit quality.

Did quantitative easing work?

First, we rewrite the no-arbitrage condition for Northern production.

Offshoring production: a simple model of wages, productivity, and growth

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:

Regional external economies and economic growth under asymmetry

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.

Evaluating R&D projects with hedging behavior: decision makers can systematically reduce the unique risk of an R&D project by taking the firm 's hedging behavior into account

Using the expression for profits (5) in the no-arbitrage condition (8), and rearranging terms, one can find that: (14)

Virtual integration and endogenous growth in the world economy

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).

Forces That Shape the Yield Curve

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).

The influence of firms' financial policy on tax reform

What is relevant is whether a no-arbitrage condition holds which equalizes rates of return (possibly adjusted for risk) on assets in different locations.

Investment, saving, and taxation in an open economy

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