Rational Pricing Law and Legal Definition

Rational pricing is a financial theory that contends that asset prices will symbolize the arbitrage-free pricing level for those assets as any deviation from this price will be "arbitraged away". This is a presumption in financial economics that any deviation from arbitrage-free price levels for an asset will reflect in arbitrageurs immediately trading away the profit opportunity on the asset until it trades at an arbitrage-free price. This assumption is effective in pricing fixed rate bonds, particularly bonds, and is central to the pricing of derivative instruments.