ABSTRACT
The notion of the existence of arbitrage opportunities in financial markets constitutes a significant area of continuing research in financial economics. Given the current values at which traded securities, such as stocks and bonds, can be bought and sold, is it possible, for example, to construct so-called arbitrage portfolios containing some or all of these securities with a current total value of zero and a strict positive value, with certainty, some time in the future? If it is, one would not expect to achieve an equilibrium between or within financial markets. Investors would recognize these opportunities and perform arbitrage strategies on a very large scale by buying securities that are relatively undervalued and vice versa. This will change the prices of traded securities and eliminate the opportunities for arbitrage, accordingly. An interesting problem arising from this mechanism is the formulation of conditions regarding the current values of traded securities and their probability distributions so that such arbitrage opportunities do not exist.
