Arbitrage And No Arbitrage Principle, Science, And Corporate Finance

Modern finance theory's research on arbitrage is mainly focus on the supposition of no arbitrage opportunity. That is because in financial market the emerge of arbitrage is conflict with equilibrium. No arbitrage principle suppose there is no arbitrage opportunity in financial market. If there is an arbitrage opportunity, that means there is a wealth pump.It is Keynes who in 1923 first introduced no arbitrage principle to explain interest parity. While it is Modigliani and Miller who first use no arbitrage principle in corporate finance field to explain MM theory, which is about the relationship of firm's capital structure and it's value. MM theory makes corporate finance have solid analysis method and mathematical theory basis, and we can say Modigliani and Miller's theory make corporate finance have a solid foundation. After MM theory is set up, no arbitrage principle played an important role in corporate finance research. This article gives a summery to this.With no arbitrage principle used in more corporate finance theory research, no arbitrage analysis becomes a basic analysis method in corporate finance, just as equilibrium analysis. At the same time, no arbitrage principle strongly correlated with neutral risk supposition. When no risk arbitrage opportunity emerge, all the people in the market will make arbitrage, no matter what is his attitude to risk.No arbitrage principle is the essence of modern corporate finance theory. Only through no arbitrage principle, can we really understand and master modern corporate finance's structure and its development step. This article also gives a summery to no arbitrage principle's meaning to theory and reality.