Virtual Arbitrage Pricing Theory

Details Virtual Arbitrage Pricing Theory Virtual Arbitrage Pricing Theory

1999-02-03

arxiv.org/abs/cond-mat/9902045v1

Physics

Condensed Matter

Statistical Mechanics

Latex, 12 pages

Scientific paper

We generalize the Arbitrage Pricing Theory (APT) to include the contribution of virtual arbitrage opportunities. We model the arbitrage return by a stochastic process. The latter is incorporated in the APT framework to calculate the correction to the APT due to the virtual arbitrage opportunities. The resulting relations reduce to the APT for an infinitely fast market reaction or in the case where the virtual arbitrage is absent. Corrections to the Capital Asset Pricing Model (CAPM) are also derived.

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