- Fundamental theorem of arbitrage-free pricing
In a general sense, the fundamental theorem of arbitrage/finance is a way to relate

arbitrage opportunities with risk neutral measures that are equivalent to the original probability measure.**The fundamental theorem in a finite state market**In a finite state market, the fundamental theorem of arbitrage has two parts. The first part relates to existence of a risk neutral measure, while the second relates to the uniqueness of the measure (see Harrison and Pliska):

#The first part states that there is no arbitrage if and only if there exists a risk neutral measure that is equivalent to the original probability measure.

#The second part states provided absence of arbitrage, a market is complete if and only if there is a unique risk neutral measure that is equivalent to the original probability measure.The fundamental theorem of pricing is a way for the concept of arbitrage to be converted to a question about whether or not a risk neutral measure exists.

**The fundamental theorem in more general markets**When stock price returns follow a single

Brownian motion , there is a unique risk neutral measure. When the stock price process is assumed to follow a more general semi-martingale (see Delbaen and Schachermayer), then the concept of arbitrage is too strong, and a weaker concept such asNo free lunch with vanishing risk must be used to describe these opportunities in an infinite dimensional setting.**ee also***

Arbitrage pricing theory

*Rational pricing **References***M. Harrison and S. Pliska, (1981), Martingales and Stochastic integrals in the theory of continuous trading. Stoch. Proc. & Appl., Vol. 11, pp. 215–260.

*F. Delbaen, W. Schachermayer, (1994), A General Version of the Fundamental Theorem of Asset Pricing. Math. Annalen, Vol. 300, pp. 463–520.**External links*** http://www.fam.tuwien.ac.at/~wschach/pubs/preprnts/prpr0118a.pdf

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