Free Lunch

TL;DR

This paper discusses the importance of the no-free-lunch condition in financial market theory, highlighting recent efforts to formalize this assumption for the Fundamental Theorem of Asset Pricing.

Contribution

It provides a concise overview of recent developments in rigorously defining the no-free-lunch condition for asset pricing theory.

Findings

Recent work simplifies the no-free-lunch assumption

Advances in formulating the Fundamental Theorem of Asset Pricing

Clarification of the role of no-arbitrage conditions

Abstract

The concept of absence of opportunities for free lunches is one of the pillars in the economic theory of financial markets. This natural assumption has proved very fruitful and has lead to great mathematical, as well as economical, insights in Quantitative Finance. Formulating rigorously the exact definition of absence of opportunities for riskless profit turned out to be a highly non-trivial fact that troubled mathematicians and economists for at least two decades. The purpose of this note is to give a quick (and, necessarily, incomplete) account of the recent work aimed at providing a simple and intuitive no-free-lunch assumption that would suffice in formulating a version of the celebrated Fundamental Theorem of Asset Pricing.