Now you are in the subtree of Finance public knowledge tree. 

Inefficient markets and arbitrage

Financial economics is mostly quasi-equilibrium science, but the real financial markets are very dynamic and transitional.

Ed Thorp in "Inefficient markets" characterizes micro and macro (in)efficiency. Absolute macro inefficiency can be exploited by asset reallocation, while relative micro inefficiency is addressed by statistical arbitrage, relative pricing (like warrants and options) and by transitional dynamics (see Arnott-Hsu construction in the paper).

For a static pricing, Black-Scholes theory is used as a foundational and parametrizational theory. The kinetic theory (as in physics) of deviations from quasi-equilibrium BS will give various insights into asset price formation in the context of liquid financial markets. A good introduction is a lecture by Kirill Illinski from Fusion Asset Management[1] named "Arbitrage - a vice passion" [2] (a video lecture in Russian).

References

  1. FAM
  2. Supermodels by Ilinski