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 often wish for the end of the wretched remnant of my life; and that wish is a rational one; but then the innate principle of self-preservation, wisely implanted in our natures, for obvious purposes, opposes that wish, and makes us endeavour to spin out our thread as long as we can, however decayed and rotten it may be.”
—Philip Dormer Stanhope, 4th Earl Chesterfield (1694–1773)