Rational pricing is the assumption in financial economics that asset prices will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments.

A financial theory that contends that the market prices of assets will represent the arbitrage-free pricing level for those assets. This is based on the assumption that any deviation from arbitrage-free price levels for an asset will result in arbitrageurs immediately trading away the profit opportunity on the asset until it trades at an arbitrage-free price.

A typical example of where the theory of rational pricing would be expected to come into play would be two identical assets trading in different markets. If the asset traded at a lower price in one market, an arbitrage trader would attempt to make a risk-free profit by purchasing the asset in the cheaper market by short selling the asset in the more expensive market. With enough volume, this arbitrage trading would cause the prices in both markets to converge to an equal value, removing the arbitrage opportunity.

www.tandfonline.com [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

www.sciencedirect.com [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

papers.ssrn.com [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

www.nber.org [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

www.tandfonline.com [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

onlinelibrary.wiley.com [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

www.jstor.org [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

www.tandfonline.com [PDF]

… To estimate the two market prices of risk, we used as the standard deviation for aggregate wealth 5 percent per quarter (or 10 percent per year) … 0 Price ($) 5/97 11/99 8/97 11/97 5/98 8/98 11/98 2/99 2/98 5/99 8/99 Page 8. Rational Pricing of Internet Companies May/June 2000 …

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Investment theories encompass the body of knowledge used to support decision-making processes for choosing investments and the asset pricing models are then applied in determining the required rate of return on the investment in question or in pricing derivatives on these for trading or hedging.

Rational pricing is a financial theory that contends that the market prices of assets will represent the arbitrage-free pricing level for those assets.

An asset pricing model is a formal treatment and development of two main principles, outlined below, together with the resultant models.

Arbitrageurs would attempt to make risk-free profits by purchasing an asset in a cheaper market and short selling it in a more expensive market. With enough volume, this arbitrage trading would cause the prices in both markets to converge to an equal value, removing the arbitrage opportunity.

Prices are determined through market price by supply and demand.

Rational Pricing is based on assumptions.

Two identical assets trading at different prices or one asset traded at a lower price than another.

Rational pricing entails rational asset pricing.

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