"No-Arbitrage" Models of the Interest Rate Differ from "Equilibrium" Models

question 4

Multiple Choice

"No-arbitrage" models of the interest rate differ from "equilibrium" models of the interest rate in that

• A)They have a larger number of free parameters enabling them to fit the yield curve exactly.
• B)They do not admit arbitrage whereas an equilibrium model may admit arbitrage under some conditions.
• C)Equilibrium models were derived in the academic literature whereas whereas no-arbitrage models were developed mainly by practitioners.
• D)They allow for the possibility that the market is in disequilibrium

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