no arbitrage

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The absence of opportunities to earn a risk-free profit with no investment. The essential idea of arbitrage is the purchase of a good in one market and the immediate resale, at a higher price, in another market. If both the purchase and sale prices are known then the resulting profit is risk free. The absence of arbitrage ensures that markets are in equilibrium. The concept of arbitrage has been extended to financial markets. In a financial market an arbitrage portfolio involves going short in some assets and long in others, with the portfolio having zero net cost but a positive expected return. No arbitrage means that no such portfolio can be constructed so asset prices are in equilibrium.

Subjects: Economics.

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