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Aparna posted an Question
February 17, 2021 • 22:53 pm 30 points
  • UGC NET
  • Commerce

What is arbitrage argument?

Here in this approach What is arbitrage argument ? Explain this approach

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  • Rucha rajesh shingvekar

    https://efinancemanagement.com/dividend-decisions/modigliani-miller-theory-on-dividend-policy

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    Thank you so much

  • Aparna

    The dividend decisions are irrelevant to arbitrage argument....what does it implies?

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    According to the MM Hypothesis, the central point of the matter is 'Arbitrage process', which means buying and selling assets simultaneously in order to gain profit. The two transactions involved are paying dividend and raising capital either through sale of new shares or raising additional funds through loans to finance assets. The arbitrage process also implies that dividend payout ratio between two identical firms should be the same.As per MM Hypothesis, the firm's cost of capital would be independent of the dividend. Therefore, the dividend decisions are irrelevant to the arbitrage proces. Hope your doubt is clear now.

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    Thank you

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    Ronak kumari upadhyay

    The “No Arbitrage Principle” has many variations, but the basic idea is that “no” arbitrage can be expected to be found in a real economy. The reason is pretty simple: if there was an opportunity for arbitrage, someone would notice, act as a market maker, and bring the two separate markets to equilibrium. They would buy from sellers on the low price market and sell to buyers on the expensive market until the two markets had the same clearing prices. This argument is the most important example of an arbitrage argument, since if we can show that a situation is equivalent to an asset selling on two markets at different prices, we can “capture” arbitrage, which is “supposed” to not exist. The No Arbitrage Principle leads to that old joke about the economist who refuses to pick up a dollar, because “somebody would have already picked it up”. Real life arbitrage does exist, but capturing it is a race. Once an opportunity for arbitrage is used up, all the relevant markets are brought to equilibrium, and there is no longer a mismatch in pricing to exploit

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    Ronak kumari upadhyay best-answer

    Dear student arbitrage occurs when an investor can make a profit from simultaneously buying and selling a commodity in two different markets. For example, gold may be traded on both New York and Tokyo stock exchanges. hope you understand.

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