Arbitrage Pricing - What is an Equivalent Martingale Measure, and

69 Pages·2010·0.87 MB·English

Arbitrage Pricing
What is an Equivalent Martingale Measure, and why
should a bookie care?
DepartmentofMathematics
UniversityofTexasatAustin
March 27, 2010
(cid:73) Arbitrage Pricing Theory (APT)
(cid:73) Utility Maximization (and duality)
(cid:73) General Equilibrium Pricing
We are going to focus on Arbitrage Pricing Theory.
Introduction
What is Mathematical Finance?
(cid:73) Utility Maximization (and duality)
(cid:73) General Equilibrium Pricing
We are going to focus on Arbitrage Pricing Theory.
Introduction
What is Mathematical Finance?
(cid:73) Arbitrage Pricing Theory (APT)
(cid:73) General Equilibrium Pricing
We are going to focus on Arbitrage Pricing Theory.
Introduction
What is Mathematical Finance?
(cid:73) Arbitrage Pricing Theory (APT)
(cid:73) Utility Maximization (and duality)
We are going to focus on Arbitrage Pricing Theory.
Introduction
What is Mathematical Finance?
(cid:73) Arbitrage Pricing Theory (APT)
(cid:73) Utility Maximization (and duality)
(cid:73) General Equilibrium Pricing
Introduction
What is Mathematical Finance?
(cid:73) Arbitrage Pricing Theory (APT)
(cid:73) Utility Maximization (and duality)
(cid:73) General Equilibrium Pricing
We are going to focus on Arbitrage Pricing Theory.
Definition
Arbitrage
(cid:73) "Something for nothing"
(cid:73) A chance to make money with no possibility of loss
Why do I care?
(cid:73) People move in to take advantage and it goes away.
(cid:73) If I am a bank, I don’t want the prices of the
instruments that I sell to allow arbitrage.
(cid:73) Academics and practitioners may disagree.
What is Arbitrage?
What is Arbitrage?
Why do I care?
(cid:73) People move in to take advantage and it goes away.
(cid:73) If I am a bank, I don’t want the prices of the
instruments that I sell to allow arbitrage.
(cid:73) Academics and practitioners may disagree.
What is Arbitrage?
What is Arbitrage?
Definition
Arbitrage
(cid:73) "Something for nothing"
(cid:73) A chance to make money with no possibility of loss
(cid:73) People move in to take advantage and it goes away.
(cid:73) If I am a bank, I don’t want the prices of the
instruments that I sell to allow arbitrage.
(cid:73) Academics and practitioners may disagree.
What is Arbitrage?
What is Arbitrage?
Definition
Arbitrage
(cid:73) "Something for nothing"
(cid:73) A chance to make money with no possibility of loss
Why do I care?
What is Arbitrage?
What is Arbitrage?
Definition
Arbitrage
(cid:73) "Something for nothing"
(cid:73) A chance to make money with no possibility of loss
Why do I care?
(cid:73) People move in to take advantage and it goes away.
(cid:73) If I am a bank, I don’t want the prices of the
instruments that I sell to allow arbitrage.
(cid:73) Academics and practitioners may disagree.