"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

Question

"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

Quizplus · Accepted Answer

No-arbitrage models are designed to fit the yield curve exactly by using a larger number of free parameters, ensuring no arbitrage opportunities exist.

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