Abstract
The absence of arbitrage is the unifying concept for much of finance. Absence of arbitrage is more general than equilibrium because it does not require all agents to be rational. The Fundamental Theorem of Asset Pricing asserts the equivalence of absence of arbitrage, existence of a positive linear pricing rule, and existence of some hypothetical agent who prefers more to less and has an optimum. Equivalent representations of the pricing rule are the martingale measure (risk-neutral pricing), and a positive state price density. Applications of no arbitrage and these representations include Modigliani–Miller theory, option pricing, investments, and forward exchange parity.
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Dybvig, P.H., Ross, S.A. (2018). Arbitrage. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_449
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DOI: https://doi.org/10.1057/978-1-349-95189-5_449
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