Arbitrage: Elements of Financial Economics

This book uses the concept of arbitrage to value securities, that is to co nstruct the elements of financial economics. The book is divided into three parts. Part 1 develops the foundations for t he study - it introduces the concepts of securities and arbitrage and estab lishes the basic arbitrage theorem, that security prices may be expre ssed as expected discounted values. Part II applies the basic theorem in a single-period setting: it develops a version of the capital asset prici ng model under exact arbitrage and the arbitrage pricing technique under approximate arbitrage. Part III extends the discussion to a many- period setting. It uses static arbitrage to value futures and related secur ities, dynamic arbitrage to value options and other derivatives, and, as a coda, risk arbitrage to investigate market efficiency.