Definition
Arbitrage is the simultaneous purchase and sale of the same commodity or security in two different markets in an attempt to profit from price differences in the two markets.
Arbitrage pricing theory (APT) is designed as a replacement for the untestable capital asset pricing model. In essence, the APT says that asset returns are a linear function of various macro-economic factors (e.g., industrial production, the spread between long- and short-term interest rates, expected and unexpected inflation, the spread between high- and low-grade bonds).
At the present time the model’s empirical validity, testability, and the number and identity of its return-generating factors are controversial issues in financial economics.
References
- American Marketing Association, AMA Dictionary.