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Virtual Arbitrage Pricing Theory

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  • Kirill Ilinski

    (University of Birmingham, UK)

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.

Suggested Citation

  • Kirill Ilinski, 1999. "Virtual Arbitrage Pricing Theory," Finance 9902001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9902001
    Note: Type of Document - Postscript; prepared on UNIX Sparc TeX; to print on HP; pages: 12
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    References listed on IDEAS

    as
    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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    More about this item

    Keywords

    asset pricing; virtual arbitrage;

    JEL classification:

    • G - Financial Economics

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