Rational Pricing

AAA

DEFINITION of 'Rational Pricing'

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.

INVESTOPEDIA EXPLAINS 'Rational Pricing'

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.

RELATED TERMS
  1. Geographical Pricing

    Adjusting an item's sale price based on the buyer's location. ...
  2. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage ...
  3. Market Arbitrage

    Purchasing and selling the same security at the same time in ...
  4. Statistical Arbitrage

    A profit situation arising from pricing inefficiencies between ...
  5. Basing Point

    A specific location used in the basing point pricing system. ...
  6. Arbitrage Pricing Theory - APT

    An asset pricing model based on the idea that an asset's returns ...
Related Articles
  1. Arbitrage Squeezes Profit From Market ...
    Options & Futures

    Arbitrage Squeezes Profit From Market ...

  2. An Introduction To Day Trading
    Active Trading Fundamentals

    An Introduction To Day Trading

  3. Trading The Odds With Arbitrage
    Options & Futures

    Trading The Odds With Arbitrage

  4. Put-Call Parity And Arbitrage Opportunity
    Options & Futures

    Put-Call Parity And Arbitrage Opportunity

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center