The paper reports an experiment on the pricing of financial options. Arbitrage-free option pricing is tested against three hypotheses based on mental accounting. The data show that, even with considerable experience, unexploited arbitrage opportunities persist. Subjects do not seem to make the connections between the different investment possibilities, as essential for arbitrage-free pricing (A...

2 Basic Theory 4 2.1 Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Arbitrage, State Prices, and Martingales . . . . . . . . . . . . 5 2.3 Individual Agent Optimality . . . . . . . . . . . . . . . . . . . 8 2.4 Habit and Recursive Utilities . . . . . . . . . . . . . . . . . . . 9 2.5 Equilibrium and Pareto Optimality . . . . . . . . . . . . . . . 12 2.6 Equilibrium ...

King and Korf [9] introduced, in the framework of a discrete-time dynamic market model on a general probability space, a new concept of arbitrage called free lunch in the limit which is slightly weaker than the common free lunch. The definition was motivated by the attempt at proposing the pricing theory based on the theory of conjugate duality in optimization. We show that this concept of arbi...

Classical theories of financialmarkets assume an infinitely liquidmarket and that all traders act as price takers. This theory is a good approximation for highly liquid stocks, although even there it does not apply well for large traders or for modelling transaction costs. We extend the classical approach by formulating a new model that takes into account illiquidities. Our approach hypothesize...

A large financial market is described by a sequence of standard general models of continuous trading. It turns out that the absence of asymptotic arbitrage of the first kind is equivalent to the contiguity of sequence of objective probabilities with respect to the sequence of upper envelopes of equivalent martingale measures, while absence of asymptotic arbitrage of the second kind is equivalen...

This paper studies asset pricing in arbitrage-free financial markets in general state space (both for frictionless market and for market with transaction cost). The mathematical formulation is based on a locally convex topological space for weakly arbitrage-free securities’ structure and a separable Banach space for strictly arbitragefree securities’ structure. We establish, for these two types...

This research compares the Arbitrage Pricing Theory (APT) to Capital Asset (CAPT) by looking at numerous macroeconomic factors that affect market security prices and determining how APT explains majority of returns. The goal this study was look fundamental aspects (revenue, assets, liabilities, growth potentials) in order compute intrinsic value based on investor's risk tolerance. BSE NSE websi...