Assumption Of Arbitrage Research Articles

General Proof of Modigliani-Miller Propositions I and II using Parameter- Preference Theory

The following proof of Modigliani and Miller's (MM) [2] famous propositions concerning the valuation of the firm and the cost of capital does not require the usual risk-class or arbitrage assumptions; the proof depends only on the Fundamental Theorem of Parameter-preference, which states that the riskpremium for security A is a linear combination of its comoments with the market index, .

The relation between international capital flows and interest rates: A theoretical analysis

Commonly, macro trade models which analyze the effects of governmental policies assumed that the rate of the international flow of capital is dependent upon international interest rates. This paper demonstrates that such a specification is inconsistent with the assumption of arbitrage in securities internationally.

Asset Valuation, Firm Investment, and Firm Diversification

In Section I of the present paper, it is shown that Proposition I (relationship between income streams) and the irrelevancy of firm-investment diversification hold in the multiperiod case, with risky (as well as riskless) debt and with no assumption regarding which income-stream parameters (e.g. mean an variance) are used by investors in selecting portfolios. That is, no particular valuation equation is assumed. Proposition I is derived first , given homogeneous investor expectations, and then is extended to the case of heterogeneous expectations by adding a further assumption. In Section II, corporate taxes are introduced. Proposition I does not hold in this case. However, a similar proposition is derived and found to imply that diversification should not be a consideration for firm-investment policy even with corporate taxes. In establishing the results of Section I and II, it is assumed that capital markets are competitive with zero transaction costs and that, therefore, can be performed in the market. In Section III, the arbitrage assumption is briefly examined.