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Virtual Arbitrage Pricing Theory

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  • Kirill Ilinski

Abstract

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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  • Kirill Ilinski, 1999. "Virtual Arbitrage Pricing Theory," Papers cond-mat/9902045, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/9902045
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    1. Kirill Ilinski & Alexander Stepanenko, 1999. "Derivative pricing with virtual arbitrage," Papers cond-mat/9902046, arXiv.org.
    2. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
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