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This is a pricing methodology that basically says that the price of any contract (or financial instrument) is exactly that which prevents ANY market participants from exploiting the price to make a risk free profit. Sometimes this price is unique. Many times, it is not. Sam

how is it different from BARRA equity model?

Any assets or financial strategies, which produce the same flows of money should have the same price. So the goal of arbitrage pricing theory is to describe an unknown financial asset as a combination (called a hedge) of assets with a known price. This price must then be the price of the unknown asset. Just to be clear - it is the idea that prices of equivalent traded assets (or trading strategy, financial contract etc) SHOULD be UNIQUE.If this isn't true then it is possible (in theory) to use the hedge portfolio to produce an instant risk-free profit called an arbitrage. The assuption that arbitrage opportunities do not exist in real markets is one of the few principles of financial 'physics' since it attempts to describe the behaviour of real markets and it is (apparently) a reasonable approximation to real life market behaviour. However the application of arbitrage pricing theory is not entirely dependent upon the 'physics' of the markets in fact it would be very nice if markets never charged the no-arbitrage price...

Any assets or financial strategies, which produce the same flows of money should have the same price.Hope I'm not overlooking the obvious, but is there some additional qualification? For e.g., if one considers 2 bonds by different issuers with the same face value, same fixed coupons, same maturity & same coupon payment days but different credit ratings, while the cash flows are the same the bond prices surely must be different?! Perhaps I have pulled your comment out of context?

QuoteOriginally posted by: WaaghBakri<i>Any assets or financial strategies, which produce the same flows of money should have the same price.</i>Hope I'm not overlooking the obvious, but is there some additional qualification? For e.g., if one considers 2 bonds by different issuers with the same face value, same fixed coupons, same maturity & same coupon payment days but different credit ratings, while the cash flows are the same the bond prices surely must be different?! Perhaps I have pulled your comment out of context?the two bonds don't produce the same cash flow if one of the issuers defaults so the "law of one price"is not applicableMJ

I probably should have written - produce the same flows of money in all possible states of the world.

I am trying to understand multi factor equity model from the data vendor called APT.It is based on this arbitrage pricing model, but I can't really relate idea behind APT to their multi factor model.Thanks,

QuoteOriginally posted by: TombRaiderI am trying to understand multi factor equity model from the data vendor called APT.It is based on this arbitrage pricing model, but I can't really relate idea behind APT to their multi factor model.Thanks,APT usually implies more than one common factor ~ multifactors. These factors can be statisitcally or fundmentally driven. Different vendors provide different approaches to the APT concept. But they all beleive that more than one factor drive asset prices.