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Prof. Derdenger
Aj if qj > 0
pj
Bj if qj < 0
Let vj > 0 denote the expected present value of the dividend stream
plus the liquidation value of the j th assest
The Arbitrage Pricing Theory (APT) says:
J
∑ (vj pj )qj 0
j =1
where
v1 is the demand factor for wireless
v2 is the demand factor for cable
v3 = 2v1 + v2
Prof. Derdenger (CMU) 6 / 12
Arbitrage Pricing in Limit Order Markets
The only way to achieve production e¢ ciency in this sector is for every …rm
to specialize in one of the three market segments. We assume this happens,
and analyze the resulting arbitrage conditions.
For arbitrage to be not present we need pricing in the …rst two segments to
follow for j 2 f1, 2g :
2v j Aj
Bj 2v j
and for the third sector
4v 1 +2V 2 A3
4v 1 +2v 2 B3
Putting the four sets of inequalities together we obtain two inequalities in
terms of prices
(revenue from selling) 2B 1 +B 2 A3 (cost of buying)
(cost of buying) 2A1 +A2 B3 (revenue from selling)
Prof. Derdenger (CMU) 7 / 12
E¢ cient Market hypothesis
An Example