Short Answer Equilibrium models focus on market balance; no-arbitrage models ensure no profit from arbitrage opportunities.
The essence of the no-arbitrage restrictions is that in an n-factor model, the mapping from one bond's yield to the n factors can be written in terms of similar mappings for n + 1 other “base” bonds. (We need n + 1 bonds instead of n because the restrictions are tied to expected excess returns, not expected returns.)
Risk arbitrage differs from pure arbitrage in that it involves risk, whereas pure arbitrage seeks to lock in a guaranteed profit the moment trades are initiated. But the risks involved in risk arbitrage are calculated risks that, when done correctly, can be tilted in the trader's favor.
We define formally an arbitrage opportunity (see Tangent) as a self-financing trading strategy (x,y) such that the value of the initial portfolio (x1,y1) at time 0 is less than or equal to 0, but the value of the final portfolio (xT,yT) at time T is nonnegative with probability 1 and positive with positive probability.
How to Identify Arbitrage Betting Opportunities Using an odds comparison site such as Oddschecker, find a sporting event which offers two outcomes. Find the highest odds available for each outcome from two different bookmakers. Calculate whether the odds represent an arbitrage betting opportunity.
Since the arbitrage entails buying certain assets at time t = 0, there would be, in effect, an infinite demand for such assets. Economists tell us that this would immmediately raise the prices of these assets, and the arbitrage opportunity would vanish.
Some benefits of arbitrage include riskless profits, market efficiency, increased liquidity, and income diversification. The potential downsides of arbitrage include transaction costs, as well as liquidity, model, legal, and regulatory risks.
The process is as follows: Using an odds comparison site such as Oddschecker, find a sporting event which offers two outcomes. Find the highest odds available for each outcome from two different bookmakers. Calculate whether the odds represent an arbitrage betting opportunity.