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Topic: Arbitrage pricing theory

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In the News (Mon 22 Apr 19)

  Arbitrage Pricing Theory
Arbitrage Pricing Theory (APT) is an alternative model to the Capital Asset Pricing Model (CAPM).
Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets and thereby making a risk free profit.
APT holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors, where sensitivity to changes in each factor is represented by a factor specific beta coefficient.
www.12manage.com /description_arbitrage_pricing_theory.html   (189 words)

In relation to economics, the term arbitrage refers to the practice of taking advantage of a state of imbalance between two or more markets; this is a combination of matching deals that are struck which capitalize upon the imbalance and the profit made is the difference between the market prices.
Arbitrage usually reduces price discrimination and does this by encouraging people to buy an item in a market where the price is low, and resell it at a different market where the price is high.
Arbitrage also affects the difference in interest rates paid on government bonds, issued by the different countries, while taking into account the expected depreciations in the currencies, in relation to each other.
www.rateempire.com /hedge_fund/arbitrage.html   (2350 words)

 Arbitrage - an introduction - Citizendium
An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate (or, the asset does not have negligible costs of storage; as such, for example, this condition holds for grain but not for securities).
Traders may, for example, find that the price of wheat is lower in agricultural regions than in cities, purchase the good, and transport it to another region to sell at a higher price.
Also called risk arbitrage, merger arbitrage generally consists of buying the stock of a company that is the target of a takeover while shorting the stock of the acquiring company.
en.citizendium.org /wiki/Arbitrage   (3424 words)

 Arbitrage Pricing Theory or APT
As its name implies, the Arbitrage Pricing Theory, or APT, describes a mechanism by which investors can identify an asset such as a share of common stock that is incorrectly priced and bring that price back into alignment with its actual value.
APT model was first described by Steven Ross in and article entitled The Arbitrage Theory of Capital Asset Pricing which appeared in the Journal of Economic Theory in December 1976.
For example, the price of a share of ExxonMobil might be very sensitive to the price of crude oil, while a share of Colgate Palmolive might be relatively insensitive to the price of oil.
www.money-zine.com /Investing/Stocks/Arbitrage-Pricing-Theory-or-APT   (757 words)

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 Capital Asset Pricing Model or CAPM
In general, the capital asset pricing model describes the relationship between the risk of a particular asset or stock, its market price, and the expected return to the investor.
The capital asset pricing model states that the price of a stock is tied to two variables - the time value of money and the risk of the stock itself.
We've already discussed in our publication on Calculating Stock Prices how the price of a common stock is equal to the discounted value of the expected dividend stream and the end of period stock price.
www.money-zine.com /Investing/Stocks/Capital-Asset-Pricing-Model-or-CAPM   (854 words)

 Arbitrage pricing theory
The basis of arbitrage pricing theory is the idea that the price of a security is driven by a number of factors.
The difference between CAPM and arbitrage pricing theory is that CAPM has a single non-company factor and a single beta, whereas arbitrage pricing theory separates out non-company factors into as many as proves necessary.
Arbitrage pricing theory does not rely on measuring the performance of the market.
moneyterms.co.uk /apt   (334 words)

 Arbitrage-Free Pricing
Prices are determined relative to other prices quoted in the market in such a manner as to preclude any arbitrage opportunities.
An arbitrage condition is a relationship that must prevail between certain prices if they are to be arbitrage-free.
Black and Scholes identified an arbitrage condition that, given certain simplifying assumptions, must hold between the price of an option and the value of a corresponding replicating portfolio.
www.riskglossary.com /articles/arbitrage_free_pricing.htm   (505 words)

 Vernimmen - Definition of Arbitrage - Finance dictionary
With no overall outlay of funds or assumption of risk (in theory, at least!), arbitrage involves combining several transactions that ultimately yield a profit.
Thanks to arbitrage, all prices for a given asset are equal at a given point in time.
Arbitrage ensures fluidity between markets and contributes to their liquidity.
www.vernimmen.com /html/glossary/definition_arbitrage.html   (321 words)

 eLearning Session
Arbitrage Pricing Theory is another theory on risk and return similar to the CAPM.
Using the concept of well-diversified portfolios, the APT arrives at an expected return-beta relationship for portfolios identical to that of the CAPM.
Multifactor Generalization of the APT and the CAPM It is easy to think of several factors that might affect stock returns: business cycles, inflation, oil prices, and so on.
www.mhhe.com /business/finance/bkm/essentials4e/student/olc/ch08els.html   (885 words)

 Vernimmen - Definition of Arbitrage pricing theory, APT - Finance dictionary
The Arbitrage Pricing Theory model, proposed by Stephen Ross, assumes that the risk premium is a function of several variables, not just one, i.e.
The model does not stipulate which V factors are to be used.
They can be the oil price, changes in the yield curve, exchange rates, inflation rate, manufacturing activity indexexes, etc.
www.vernimmen.com /html/glossaire/definition_arbitrage_pricing_theory_apt.html   (416 words)

 Pricing by Arbitrage
so that the price of asset f is linearly related to the variety of rates of return it obtains, with the weights representing the marginal value of different states or "state prices".
Consequently, the linear pricing rule states that the price of this bond is equal to the price of a bundle of nine Arrow securities (three of the type which pay in state 1, four of which pay in state 2, etc.).
Notice that to obtain the linear pricing rule, we required unlimited short-sales - a proposition which directly goes against Radner's (1972) assumption of a lower bound to ensure existence of a Radner equilibrium.
cepa.newschool.edu /het/essays/sequence/arbitpricing.htm   (1462 words)

 What is the Arbitrage Pricing Theory?
One of the first things to understand about the arbitrage pricing theory is that the concept has to do with the process of asset pricing.
Developed by economist Stephen Ross in 1976, the underlying principle of the pricing theory involves the recognition that the anticipated return on any asset may be charted as a linear calculation of relevant macro-economic factors in conjunction with market indices.
The desired result is that the asset price will equal to the anticipated price for the end of the period cited, with the end price discounted at the rate implied by the Capital Asset Pricing Model.
www.wisegeek.com /what-is-the-arbitrage-pricing-theory.htm   (519 words)

 MPPM540: Chapter 6
The APT gives up the notion that there is one right portfolio for everyone in the world, and it replaces it with an explanatory model of what drives asset returns.
While formal proofs of the APT rely upon static equilibrium arguments, the spirit of the APT is an active one.
The APT allows the manager select a diversified portfolio of stocks that has low exposure to inflation shocks (oil prices are correlated to inflation).
viking.som.yale.edu /will/finman540/classnotes/class6.html   (1896 words)

After a merger deal is announced, the price of the target company usually moves substantially higher to reflect the premium in value being paid by the acquiring company.
The size of the arbitrage spread is usually a good indicator of the probability of success assigned by the market participants for each deal.
After the announcement, the stock of company T trades at $18 per share, therefore the arbitrage spread is $2 or 11.1%.
www.arbitrageview.com   (789 words)

 Option Pricing Theory
Option pricing theory—also called Black-Scholes theory or derivatives pricing theory—traces its roots to Bachelier (1900) who invented Brownian motion to model options on French government bonds.
To learn about the historical origins of option pricing theory, Bernstein (1993) offers a nice overview of 20th century finance.
Chriss (1997) is an excellent introduction to option pricing theory and financial engineering.
www.riskglossary.com /link/option_pricing_theory.htm   (1722 words)

This paper develops a theory and econometric method of portfolio performance measurement using a competitive equilibrium version of the Arbitrage Pricing Theory...
This paper develops a semiautoregression approach to estimate factors of the arbitrage pricing theory (APT) which describes asset returns slightly better than the CAPM, although there is still some mispricing in the APT model...
This paper examines the cross-sectional pricing equation of the APT using the elements of eigenvectors and the maximum likelihood factor loadings of the covariance matrix of returns as measures of risk...
www.casact.org /dare/index.cfm?fuseaction=browse_lev3&lev1=100&lev2=962&categorylist=965   (580 words)

 Arbitrage Pricing, Common Knowledge Priors, and Market Completeness
The canonical arbitrage pricing model extant consists of a single time period, starting at time 0 and ending at time 1.
This assumption implies that any individual, acting independently of the other traders, can force prices to be positive or zero, depending upon his beliefs.
This section generalizes the canonical arbitrage pricing model to include uncertainty over investor beliefs in asset pricing.
michaelguth.com /economist/chap6.htm   (3437 words)

 [No title]
Cho, D. Chinhyung, Edwin J. Elton, and Martin J. Gruber, "On the Robustness of the Roll and Ross Arbitrage Pricing Theory." Journal of Financial Quantitative Analysis 19 (March 1984): 1-10.
Connor, Gregory and Robert A. Korajczyk, "Performance Measurement with the Arbitrage Pricing Theory: A New Framework for Analysis." Journal of Financial Economics 15 (March 1986): 373-394.
Dybvig, Philip H., "An Explicit bound on Deviations from APT Pricing in a Finite Economy." Journal of Financial Economics 12 (December 1983): 483-496.
www.kellogg.northwestern.edu /faculty/korajczy/htm/aptlist.htm   (3830 words)

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