Rational pricing is the assumption in financial economics that asset prices (and hence asset pricing models) will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments.
Read more about Rational Pricing: Arbitrage Mechanics, Fixed Income Securities, Pricing Derivatives, Pricing Shares
Famous quotes containing the word rational:
“[I]n Great-Britain it is said that their constitution relies on the house of commons for honesty, and the lords for wisdom; which would be a rational reliance if honesty were to be bought with money, and if wisdom were hereditary.”
—Thomas Jefferson (1743–1826)
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