• Table of Contents
    • Abstract
    • Keywords
    • Article
      • Early uses of the law of one price
      • The fundamental theorem of asset pricing
      • Alternative representations of linear pricing rules
      • Modern results based on the absence of arbitrage
    • See Also
    • Bibliography
    • How to cite this article


Philip H. Dybvig and Stephen A. Ross
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
Alternate versions available: 1987 Edition
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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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How to cite this article

Dybvig, Philip H. and Stephen A. Ross. "arbitrage." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 18 January 2018 <http://www.dictionaryofeconomics.com/article?id=pde2008_A000123> doi:10.1057/9780230226203.0052

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