Abstract The efficiency of security prices depends upon arbitrage, that is, trading based upon knowledge that the price of an asset is different from its fundamental value. (Although the term ‘arbitrage,’ strictly speaking, refers to an entirely riskless speculation, we use the term in the broader sense common among practitioners.) For example, suppose an agent has private information about a high future dividend to be paid by a firm. If the current stock price does not reflect this information, then the agent can profit by buying the stock, if his purchase does not instantly raise the price, and holding it until the dividend is paid.