Interest rate paradox

Ivanov, Sergei (2013): Interest rate paradox.

Abstract

System’s properties are not always determined by properties of its elements. In this paper was made an attempt to analyze securities not isolated, but with respect to environment, i.e. participants’ operations on a market, which results depend on securities. It was shown that risk-neutral probability density, implied in prices, depends on these operations. No arbitrage conditions were developed for this case. Using them it was shown that there are operations that make function that must be a probability density function not a probability density function. These operations are possible if there are assets with positive price and non-zero interest rate. Arbitrage is possible in this case and such market is inefficient.

• Item Type: MPRA Paper
• Language: English
• Keywords: market efficiency, probability density, interest rate, arbitrage, efficiency conditions
• Subjects: G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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