YAFT: Why can't a condition of arbitrage exsist for an indefinite period of time

[DVK916]

Why can't you have a condition of arbitrage that exsist for an indefinite period of time. What would happen arbitrage did exsist for an indefinite period of time.

I am refering to specifically the market of stocks and bonds.

 

[Tuktuk]

DYOHW

 

[BigJ]

Looks like science boy that looks down on everyone who doesn't take advanced calculus can't do his intro finance hw.

 

[DVK916]

This isn't a HW question. I was just wondering.

 

[ElFenix]

nature ahbors a vacuum

 

[dbk]

It can't...it just can't.

 

[m1ldslide1]

I was under the impression that when demand increases, supply decreases or at least price goes up. Same with arbitrage - once you (and thousands of others) start taking advantage, it evens out rather quickly.

 

[iversonyin]

Because people makes money by arbitraging. Buying and selling the overpriced/underpriced matching assets until the two reach equalibrium. Therefore, indefinite arbitrage situation can not exist indefinitely. If it does exist indefinitely, that means asset price doesn't move OR everyone will simply be an arbitrager because arbitrage in its nature...its riskless/riskfree.

http://en.wikipedia.org/wiki/Arbitrage

 

[yowolabi]

Thank you for making me look up arbitrage. Good reading.

It seems like arbitrage is self correcting. The act of taking advantage of it eventually leads to a condition where it no longer exists.

 

[b0mbrman]

Originally posted by: DVK916
This isn't a HW question. I was just wondering.

Yeah, that's totally the thing that keeps me up at night

 

[iversonyin]

Originally posted by: b0mbrman

Originally posted by: DVK916
This isn't a HW question. I was just wondering.

Yeah, that's totally the thing that keeps me up at night

Waking up in the middle of the night, breaking sweat and having nightmare about arbitrage? Yea, me too.

 

[zinfamous]

Originally posted by: ElFenix
nature ahbors a vacuum

:thumbsup:

now, waits for obligatory M4H pic posting...

 

[jman19]

DVK you asshat, stop asking other people to do your damn HW :roll:

If you know the definition of arbitrage you should be able to reason this out yourself, but I guess that is asking for too much.

 

[yowolabi]

Originally posted by: jman19
DVK you asshat, stop asking other people to do your damn HW :roll:

If you know the definition of arbitrage you should be able to reason this out yourself, but I guess that is asking for too much.

I spent two minutes looking up the definition and then was able to arrive at the apparently right answer. It does seem strange that if he could understand the concept, he couldn't figure it out himself.

 

[DVK916]

Originally posted by: jman19
DVK you asshat, stop asking other people to do your damn HW :roll:

If you know the definition of arbitrage you should be able to reason this out yourself, but I guess that is asking for too much.

I know the difinition of arbitrage.

Given an initial investment of 0, and let Rt be the return at time t.

E(Rt)>=0
P(Rt>0)>0
P(Rt<0)=0

Basically given a zero dollar investment, there is a postive chance you will make money, and no chance you will lose money at any time period state. It is a riskless investment.

 

[Gibsons]

If nobody knows the condition exists (or extracts money from it), I don't see why it can't stay around indefinitely.

 

[jman19]

Originally posted by: DVK916

Originally posted by: jman19
DVK you asshat, stop asking other people to do your damn HW :roll:

If you know the definition of arbitrage you should be able to reason this out yourself, but I guess that is asking for too much.

I know the difinition of arbitrage.

Given an initial investment of 0, and let Rt be the return at time t.

E(Rt)>=0
P(Rt>0)>0
P(Rt<0)=0

Basically given a zero dollar investment, there is a postive chance you will make money, and no chance you will lose money at any time period state. It is a riskless investment.

Yea, you are definitely asking for HW advice :laugh:

 

[Zenmervolt]

Originally posted by: DVK916
I know the difinition of arbitrage.

Given an initial investment of 0, and let Rt be the return at time t.

E(Rt)>=0
P(Rt>0)>0
P(Rt<0)=0

Basically given a zero dollar investment, there is a postive chance you will make money, and no chance you will lose money at any time period state. It is a riskless investment.

So you can repeat what a textbook says. Whoop-de-do.

If you have to ask why it cannot exist indefinitely you are in dire need of learning how to think. Rote memorization of facts is ultimately inferior to the ability to synthesize concepts. For $1,000 I can get a computer to memorize facts, but it cannot evaluate concepts.

Answering why arbitrage cannot exist indefinitely requires the ability to evaluate concepts and if I were to do this for you, you'd simply repeat what I said without arriving at the conclusion on your own.

ZV

ZV

 

[nakedfrog]

Entropy, dummy!